Our New York Times Op-Ed: How the Banks Put the Economy Underwater

Several regular readers were kind enough to send congratulatory e-mails on our New York Times op-ed, which appears in the Sunday edition. I hope you enjoy it. The text follows:

In Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.

Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.

The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”

Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.

However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.

When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.

This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.

A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.

The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.

Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.

Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.

As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.

Other serious abuses are coming to light. Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.

The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.

That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?

There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.

The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.

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201 comments

  1. Francois T

    Let me join those who congratulated you.
    Somehow, I missed that op-ed.

    One snippet really caught my attention:

    For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

    So, it is fair to conclude that cramdowns and reductions in principal could be a boost for the real economy…correct?

    (Or are there several layers of interlocked econ consequences that are escaping my non-financier/economist eye…yet again?)

    If correct, refusal form this administration to act would be a rather definitive proof that unemployment doesn’t matter that much for them.

    1. Eric

      Well, if cramdowns or principal reductions work, so do proper foreclosures. With cramdowns, for new lending if that is the way we want to move forward, that’s fine. But to introduce it on contracts negotiated and signed with all parties understanding it wasn’t available is pretty risky. It isn’t worth it if the result is everyone needs to price in unforeseen changes in the law….”here’s your extra 80 bp because we aren’t sure what the guys in Sacremento might be doing in the next 30 years”. As for principal reductions – nothing is stopping them now! It’s just most every time I hear about it, somewhere in the fine print (or headline – depending) the deal is that the taxpayer gets involved. Why’s that?

      1. Jim the Skeptic

        Eric says: It isn’t worth it if the result is everyone needs to price in unforeseen changes in the law….”here’s your extra 80 bp because we aren’t sure what the guys in Sacremento might be doing in the next 30 years”.

        Also, ”and here’s your extra 180 bp because we can’t guarantee that there isn’t some fraud involved in these securities which might be discovered sometime in the next 30 years”.

        So now we have 260 extra bp because of the banksters! Of course both of these are only theory and the latter bps may be much worse.

        Maybe we will have to conjure up a world where only GSEs sell these securities. Wait a minute….., we already had such a world!

      2. Ray L Phenicie

        ‘But to introduce it on contracts negotiated and signed with all parties understanding it wasn’t available is pretty risky.’

        Wait, time out.

        All Parties Understanding-only one party had an understanding of the trap that was being set for the benefit of the mortgage industry Mr. Nogoodnicks-the devious perpetrators of the woolly scheme-as Yves points out the investors had no idea the perps were devious and certainly Joe Smith on 12345 Main Street, Anytown, USA, had no idea of the devious nature of the document he was signing.
        And by the way, the perps have always said-IMHOP, ‘oh well, if this scheming fails big time, Congress will bail us out and the sucker taxpayers over the next 30-50 years will pay the bill.’

        So no, there was not an understanding for all parties-just deviousness on the part of the folks perpetrating this whole mess who are indeed now waiting for Congress to come back out of the wings and ‘make it right.’

      3. Jane Doe

        You don’t sound like a lawyer or anyone who works in the area of debt or risk management.

        It is, or was, general practice for mortgage contracts to be renegotiated like this regarding risks in bankruptcy by creditors. This issue is typical of a reaffirmation agreement.

        A common practice of this includes the debtor obtaining better terms than would have been possible outside of the risk to the creditor that results from bankruptcy.

        The idea that there is something unusual about this is b.s.

    2. kievite

      One snippet really caught my attention:

      For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

      I think that statement is suspect on many levels as it puts the cart before the horse. First of all high unemployment in no way is the result of foreclosures and underwater mortgages. It is the result of collapse of “casino capitalism” model which is so profound that all sectors of the economy are depressed. As securitization mess exploded in the face of their creators it became clear that the king is naked. In many ways problems we face are more serious and long lasting that the problems the country faced during Great Depression. Due to those problems there is large structural component in unemployment: jobs in financial sector, in construction (both residential and non-residential) and in car industry are not coming back anytime soon. As a chain reaction those sectors depress employment in other sectors of the economy (especially service oriented sectors).

      Since Reagan FIRE sectors had grown disproportionally and other sectors were downsized and outsourced to the extent that the changes became structural and as such irreversible. So now the country is hostage to those structural changes and needs China and other Asian manufacturers to function properly while funds to pay for those goods are no longer here. This leads to the increase in debt which at some point is another drag on the economy and employment.

      Rent the financial sector extracts is also a tremendous drag on the economy and employment. Oil prices work in the same direction and are also important structural factor. The wave of conversion of permanent jobs into part-time is another important drag on employment.

      The costs of wars and maintaining the empire is yet another factor.

      Also labor arbitrage works both via outsourcing and Undocumented workers/H1B holders. So both high and low wage sectors are under attack. Automation works the same way eating jobs in all sectors (the latest victims are cashiers in supermarkets). Children on baby boomer are about to enter workforce while baby boomers still cling to jobs to compensate for destroyed 401K balances and housing equity.

      All those factors has nothing to do with foreclosures so this statement undermines other arguments made.

      1. grayslady

        Many excellent points. I would add that if you can’t sell your home you can’t move to a location where jobs are available. You also can’t downsize (if the issue is more one of affordability than job location), so housing expenses continue to eat up your budget.

        1. Karen

          “…if you can’t sell your home you can’t move to a location where jobs are available. You also can’t downsize…”

          I wonder whether there has been any empirical research into the importance of this theory/mechanism, especially the first part (about relocation).

          Seems to me this would mainly affect people who are still earning enough to support their existing lifestyle and mortgage payments, but would prefer a job somewhere else. For those whose household income is inadequate to keep going, seems to me a new job becomes both the only hope for (maybe) avoiding foreclosure and the only way to get back on one’s feet after a foreclosure.

          Now, maybe to some extent the ability of defaulters to live for free in their homes, in some cases apparently for a year or more, IS encouraging some to confine their job searches to the local area. But this seems a risky strategy (you have no way of knowing when the bank will “wake up” and start or enforce a foreclosure), so again I’d be curious to hear from some people in that situation before I believed that they were restricting their job searches for this reason.

          One unfortunate thing I have noticed that I believe IS probably affecting many people’s ability to get a distant job: in times like this, when employers can be choosy and when hiring bad employees can damage the company’s success more than it usually might, it is much harder to get employers to take a chance on people they don’t already know, or that are at least recommended by people they know and respect.

          1. grayslady

            I wasn’t referring so much to people trying to relocate, say for a better job within their field. I was thinking more of whole swathes of the formerly industrial midwest–especially towns that used to have one major employer–where it’s impossible to find *any* kind of job. These are people who were paying down their mortgages on time, very likely living within their means, and now their whole community has been decimated. Sometimes the towns are able to make a comeback by attracting new employers, other times not. But these are people who played by the rules, are still willing to play by the rules, but now are trapped. They need help, too.

      2. DownSouth

        Well I suppose there are proximate causes and ultimate causes.

        While I certainly don’t find anything in your comment of a factual nature to challenge, you might want to brush up on neoclassical economic theory so that you are aware of what the debate Yves refers to is all about.

        If you read Spanish, you can find a short discussion in this paper, ASPECTOS GENERALES DE LA ECONOMÍA INFORMAL, subsection 1.2.3 “Escuela económica neoclásica.”

        1. Tom Jake

          DownSouth,

          The magnitude of the economic problems in Mexico are very much understated and misunderstood by just about everybody. However, just a small sample of the cost of food is enough to show how bad it is. A kilo of sugar is now over 30 pesos, aquacates have been as high as 40 pesos a kilo, beef over 100 pesos a kilo, papaya 24 peso a kilo, chicken over 30 pesos a kilo and on and on… (peso roughly 8 cents US) Now, with minimum wage, if you are lucky enough to earn it, at around 55 pesos a day, varies by state, that just doesn’t leave a lot of room for extravagance.

          1. DownSouth

            Tom, I don’t want to get too far off the subject of this thread, but yes, the situation in Mexico is dire. Even for those fortunate enough to have a job, incomes have plummeted as <a href="Wikipedia
            “>this paper amply demonstrates.

            In a way, however, the discussion of Mexico is relevant to this thread because it provides an extremely vivid example of what our corporate overlords here in the US have in store for us. This statement from the Mexico Solidarity Network gives a good overview of what’s going on in the world:

            At the dawn of the 21st century, neoliberalism is the predominant political and economic model in the world, impacting every level of society. While giving the appearance of dominance, the neoliberal model is built on increasingly shaky ground, including shrinking democratic spaces, unsuccessful attempts at cultural hegemony under the guise of “modernization,” and a distorted distribution of wealth that has no historic precedent. The majority of the world’s people are in a savage “race to the bottom” – poorer today than they were three decades ago – and no amount of propaganda can hide this stark reality.

            [….]

            The neoliberal model represents a globalization of class alliances. The wealthiest 5 or 10% on both sides of the border, those who control the economies and political systems, have more in common with each other than they do with their fellow citizens, and the resulting neoliberal policies reflect their interests. The elites enjoy increasingly strong institutional links, while the rest of us are left with less democracy, fewer economic options, more repression, increased poverty and less sovereignty.

            Americans tend to be very insular and not look beyond their own borders, and most are not cognizant of the reason for the mass migration from their southern neighbor. I hope they wake up before the neoliberals do to them what they have done to Mexico.

          2. Doug Terpstra

            See also: “Manufacturing Mayhem in Mexico: From Nixon to NAFTA and Beyond” on Chris Floyd’s Empire Burlesque.

            http://chris-floyd.com/articles/1-latest-news/2039-manufacturing-mayhem-in-mexico-from-nixon-to-nafta-and-beyond.html

            Floyd references an article by Ben Ehrenreich: “As Ehrenreich points out in the succinct but detailed historical background he provides, the current Drug War-fueled destruction is just part and parcel of a larger assault on the underpinning of Mexican society — a wider campaign that includes brutal economic war, and the relentless militarization of society on both sides of the border. On the U.S. side, it is again a thoroughly bipartisan affair, ranging from Richard Nixon to Clinton’s NAFTA and beyond.”

    3. Paul Tioxon

      Here is what the uninitiated are missing. These 30yr fixed rate mortgages were designed for a world where people actually worked for an organization for that long or at worst, if they were laid off, it was not a euphemism for losing yr job, and being out of work for a year while you were looking for a new job, any job with another company altogether. Typically, you could be called back to work when demand picked up and orders needed fulfillment. Unemployment ins. would float you through the down times without the massive economic hardship and societal dislocation due to the idiotic banking and foreclosure system of corporate America.

      Furthermore, thanks to innovative management techniques, which have only been exceeded by financial innovations for social disintegration, 1099 independent contractors, are self employed. Thanks to downsizing, right sizing, etc. (the corporate propaganda rebranding of getting fired) so you can work for a company without being on their payroll, and they can focus on their core activities, instead of babysitting the workforce from middle age to retirement, you have no employment history. These new dislocated Americans and H1b foreigner contract workers are essentially sole proprietorships, unincorporated business entities. That is much more risk than a mortgage lender wants to deal with. Hence, the need for innovative financial products like no income no asset mortgage loans.

      The entire social contract of citizens as loyal employees and business as trusted stewards of the financial stability for 10s of millions is gone with the wind. The social relationship of a steady job that a bank had a reasonable expectation from a credit worthy pool of applicants, as part of a predictable business practice of hiring and keeping dependable people of good character, is no longer operational. When you go to apply for a loan, an approval is ipso facto proof of yr status in the social order. Or else the bank would not lend to you. Now, the bank does not care that yr average Joe or Jane is out on the street every 7 yrs due to a chaotic global marketplace for labor. The lending process predicated upon a steady supply of bank customers with predictable job status and commensurate income is no longer operational. The banking system just churns people through and extracts fees and basis points in profits from bundled sets of loans and moves on. So what if the economy regularly tanks and people are bankrupted at the rate of over 1 million families per year every year since the mid 1990s, and foreclosed upon. Keep pretending its 1955 and Ike is president and all is just swell because we are all Americans and we all in it together. People still believe that if they are getting a loan from a Federally insured and state licensed and regulated bank, they are getting something they can financially handle. Why would they be set up for failure by the people who are counting on them not to fail, just so they can stay in business and continue to lend? Because the losses are socialized, the profits are subsidized and the citizens are traumatized. Financial ruin, depression, divorce, violence, substance abuse and alcoholic self medication are the order of the day. Just like Vodka in Russia under Stalin and Brezhnev. Post traumatic stress keeps them from politically organizing.

      That’s the part your untrained eye may have skipped while looking elsewhere.

  2. Glen

    Yves,

    Very nice!

    Please keep it up. People know that they have been riped off and are pissed. And the idiots in DC and on Wall St need to know that the American people will hold them accountable.

  3. carping demon

    “Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings.

    Love to see this sentence in the MSM. Congratulations and keep speaking truth to power.

    1. kravitz

      It’s bad enough that merely refiling affadavits prove they weren’t correct in the first place. Kudos to the Judges and AGs who aren’t accepting the resubmissions, and consider them proof of intent to defraud the court. Outstanding piece, Ms. Smith.

      1. kravitz

        BTW, Ally’s point of sponsoring the ad that crops up at the bottom of the page is just what, exactly? Thinking if it pays you, it can make you modify your attack because they’re paying you? Didn’t they hear about Jon Stewart and Stephen Colbert’s Rally? Oh wait….all…

        1. Yves Smith Post author

          First, I don’t control the ads, my ad service does.

          Second, I think you see this the wrong way. I think it’s wonderfully perverse that I’m getting a teeny bit of revenue when advertisers are dumb enough to run ads on articles that are opposed to their interests. (no one ad pays anything more than a pretty trivial amount) , This occurs because ad servers (this is usually Google, which means it’s a “remnant” ad for leftover space, and usually really pays very little) will run an ad based on keywords. So if I criticize someone, their ad may show up. I see this as adding insult to injury from their perspective.

    2. Justicia

      Trick or Treat!

      Rhitholtz has posted the letter that the SEC Corp Finance folks have just sent round to the banksters about disclosure in their periodic filings:

      http://www.ritholtz.com/blog/2010/10/attention-cfos-you-must-disclose-fraudclosure-risks/

      Attention CFOs: You Must Disclose Fraudclosure Risks

      Sample Letter Sent to Public Companies on Accounting and Disclosure Issues Related to Potential Risks and Costs Associated with Mortgage and Foreclosure-Related Activities or Exposures

      1. svsm

        What are the consequences of lying on your SEC filings? It just seems that in every instance, they have been able to escape being held accountable for anything. I’d like to think there is some entity out there that has the power and the will to unravel this.

  4. ain't funny

    “…However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.”

    How about borrowers who are current on their mortgages? Do you think they will just keep paying, looking at how deadbeats are being ‘saved’ again from their own stupidity?
    Or people who used cash to pay for their house in 2004, 2005, 2006…?

    “…The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.”

    And right now the economy must be peachy rosy.

    “…mortgage-backed securities, which are the biggest asset class in the world.”

    Financially savvy people may stop reading right here.

    No offense, but it looks like this article was written by a couple of interns.

    1. Skippy

      Financially savvy people may stop reading right here….and go back to their underwater houing assets to have a nice cuppa.

    2. Yves Smith Post author

      Please do your homework. The US MBS market is bigger than the Treasury market. Asset allocators don’t alot among “stocks” versus “bonds” which is how academics talked about asset classes maybe 20 years ago, assuming a domestic-only market; asset allocations now define asset classes more finely (US stocks, but even then often some type of large cap v. small cap, versus Japanese equities versus US corporate bonds versus gold…..). Discrete hedge fund investment styles (such as global macro versus distressed debt) are treated as separate asset classes. You can argue that’s too granular, but the general point, that asset classes are a asset type +country specific is valid but usually more granular for broad asset categories with more products within them. The point is to identify an “asset class” with distinct performance characteristics so that it can be combined with other “asset classes” with sufficiently different performance characteristics so as to reduce overall portfolio risk.

      1. here's

        You can argue that’s too granular, but the general point, that asset classes are generally asset type +country specific, is valid.

        how about: Treasury’s are part of the asset class – Bonds.

        So, what market is bigger: US MBS or US Bonds?

        1. Yves Smith Post author

          I hate to seem rude, but do you have a reading comprehension problem? I already addressed that issue in the comment above. No one doing asset allocation regards “US bonds” as an asset class. Even in equities the distinctions are usually more granular. And MBS perform very differently than other bonds due to prepayment risk.

          1. DownSouth

            DB Smith said: “Arguing about the definition of ‘asset class’ does nothing to further the discussion.”

            It doesn’t? The rhetorical strategy being employed by ain’t funny is the same as was employed by Jim Haygood on this thread yesterday. Anonymous Jones skillfully and resoundingly demolishes the “poor technique” along with its “obvious mistakes.”

            Take a look. You might learn something.

          2. DB Smith

            to “Downsouth”:

            Sorry, but I don’t respond well to condescension. Folks who instruct others ‘you might learn something’ would do well to study their own advice.

          3. DownSouth

            DB Smith said: “Sorry, but I don’t respond well to condescension. Folks who instruct others ‘you might learn something’ would do well to study their own advice.”

            That’s just another losing rhetorical strategy, responding to some alleged violation of form rather than to substance.

          4. DB Smith

            @DownSouth

            The violation of form (your condescension) is not alleged, it is actual and there for all to see.

            Your personal attack on my comment contained no substance to refute; whether or not MBS constitutes an ‘the largest asset class in the world’ is basically irrelevant to the topic being discussed. It is, at best, a footnote.

          5. DownSouth

            DB Smith said: “The violation of form (your condescension) is not alleged, it is actual and there for all to see.”

            There for all to see, or for you to see? It of course matters not a whit whether there was condescension or not. What matters is that you failed to respond substantively to my comment.

            DB Smith said: “Your personal attack on my comment contained no substance to refute…”

            The substance is in the comment by Anonymous Jones I referenced:

            Second, the $1400 number is over halfway into the article. Madrick made a number of substantive points prior to that reference. No thoughts on those? Or are the facts so threatening to you that as soon as you find a minor fact-checking error that you sigh in relief that you have a tiny little foothold with which to maintain your delusional beliefs about the world in the face of overwhelming evidence that you are wrong.

            Like I said, you should have taken a look. You might have learned something.

        2. WTFR

          US MBS = Commercial MBS(CMBS) + Residential MBS(RMBS)

          US BONDS = Corporate bonds + Gov. bonds

          I think you are 100% right in this question.

        3. WTFR

          Just to add that you cannot compare US MBS market to just Treasury market in regards to asset classes. Because, US MBS market consists of two asset classes (RMBS+CMBS).

          1. Yves Smith Post author

            Sorry, Treasuries are increasingly treated as distinct due to their liquidity, while corporate bonds are notably illiquid. That’s one of the ratioanlizations for CDS, that corp bonds are so illiquid that people would rather trade them synthetically.

      2. joe l

        Yves, please answer his (set of) first questions. As a renter who prudently sat on the sidelines of this real-estate bubble, convince me to bail out those currently underwater.

        Thanks,
        Joe.

        1. Skippy

          If you invest…prepare to lose your shirt, especially in asset/investment manias.

          Skippy…no such thing as a prudent saver or investor, only illusionary risk takers.

        2. DownSouth

          Geez! What is this, the invasion of the Twoey’s?

          You know, Joe, tautology does nothing to enhance the soundness of an idea. Does Yves have to respond to every incidence of this incessant cant? It has to get very old after a while. Just like with Twoey, you guys keep screaming “Feed me!” “Feed me!” But you know, your demands are insatiable, and there’s only so much blood any one person has to give.

          For your information, I think Yves did a pretty good job of answering ain’t funny’s first questions in her 5:30 am response to JoJo (see below).

        3. Justicia

          As a renter, Joe, you should be concerned about the overall stability of your neighborhood, town or city.

          It is well documented that massive foreclosures hitting towns in California, Nevada, Florida and rust belt states, destroy the value of surrounding properties. Abandoned homes become eyesores, magnets for arson and other crimes. This, coupled with the loss of property tax revenues as homes languish in foreclosure limbo, is a huge burden on local governments. And you, as a renter, will have pay the price either in lost services, higher crime, or higher taxes and fees.

        4. craazyman

          I hear you Joe. I’m a renter too. And I cook anything with only 3 pots — a frying pan, a spaghetti boiler and a soup pot. No chef’s kitchen for me. And no Plasma TV either.

          What the hell is there on TV anyway? The last good TV show was Star Trek.

          But I’m big in Gold. That, and being a real cheapskate.

          Get into Gold and you’ll be in favor of a bailout too.

        5. attempter

          It’s not a matter of “bailing out those underwater”. The people should bail themselves out by permanently ending all payments to the banks.

          It’s really getting pathetic the way people are now brainwashing themselves into calling the victims of the banks (and of neoliberalism in general) “deadbeats”, while referring to their own de facto pro-bankster and pro-bailout position as “prudence”.

          I’m meaning to track down the genesis of this new Orwellian term “prudence”. I bet it started in a Luntz memo or something.

          Meanwhile, using the English language, nothing could be less prudent than for the diminishing number among the zombie middle class which is in full bank-driven liquidation who still aren’t yet distressed on their mortgages to think that if somehow the banks can be propped up and allowed to continue foreclosing on everyone else, they will somehow be spared. I assure you, those same banksters for whom you’re trolling will be coming for you as well.

          As for what to say about those who claim to be renters but are supporting the banksters’ Prudence offensive, well, there even the English language fails me…

  5. Eugene

    Yves,

    Great piece.

    Some of my “its always the government’s fault” acquaintances blame most of the housing crisis on Fannie Mae and Freddie Mac. Do you address their role in your book or elsewhere?

    1. Yves Smith Post author

      No, that’s dead wrong. I have a chapter in ECONNED with describes how the shadow banking system developed and why it imploded, and how that led to the crisis. Fannie and Freddie have zip to do with it.

      You can argue in a very very general way that Fannie and Freddie contributed as part of US subsidization of housing. But there were housing bubbles in the UK, Australia, Spain, Ireland, all sorts of countries with no Fannie and Freddie and less generous housing subsidies than the US. This was a far more widespread phenomenon.

      Had we merely had a housing bubble, we would only have had a bad recession, not a global meltdown. Remember, we saw superheated activity in other areas fueled by cheap debt (there was a monster takeover wave in 2006 and 2007 due to private equity firms borrowing very cheaply).

      The reason we had a crisis was the role of credit default swaps and heavily synthetic CDOs. You had side bets on the housing market that were a multiple of the real value of housing. And the banking system, which was overlevered to begin with, wound up on the wrong side of that bet due mainly to bonus gaming by trades (I discuss how that worked too).

      1. M.InTheCity

        Ah, CDS and synthetic CDOs – this is starting to heat up again, I do believe. My firm is looking to sell synthetic CDOs (and CDO squared!) to pension funds. Because, of course, pension funds always want to look sophisticated – and even if they don’t understand the risk they will load themselves up with them to get some yield. We’re back to late 2006/2007 with the stupid crap that is going on. Except with the low rates, pension funds are having to look all over the place for reliable higher yields.

        This will all end in tears (again), but I don’t see how the governments will be able to justify a second bail-out. Austerity for the plebs and then another bail-out? You can’t say you have no money and then splash it on the same miscreants as before.

        Get read for ECONned II: ECONned HARDER!

        1. michael

          the continued purchase of such risky investments to chase return given its absence elsewhere for pension funds will continue are warp speed and ironically will be the likeliest excuse used for next huge bailout. naturally, if there cannot be a bailout for pension funds by the taxpayers then all will be lost…that will be the slogan…widows and orphans and all that.
          memory is short but remember all the talk bout the 401K and how the first bailout was good for everyone because “just everyone” has a 401k of course.
          every gov’t agency at all levels of gov’t have a vested interest in maintaining the illusion that pension funds are stable and fully financed…and, knowing they are not, will certainly turn their backs while they continue to invest in the riskiest of investments to double down out of the hole they are in.

  6. Jojo

    YS wrote: “There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.”
    ———–
    But this isn’t a solution to the underlying problem of NOT having the proper mortgage paperwork. All it does is mask the problem: if the banks don’t have to foreclose, then they don’t have a problem, right? Wrong! The banks need to get the paperwork in order.

    I’m also not sure if your call for “major principle modifications” alludes to principle reductions or not. Principle reduction leads us back into that slippy slope moral problem of rewarding those who got in over their heads, either by buying at the wrong time or using their house as an ATM machine and penalizes those in the surrounding neighborhood who are managing their finances.

    As for the “authorities” coming up with a solution, I am sure that they will come up with something that heavily favors the banking industry at the expense of everyone else, including the taxpayer.

    1. Yves Smith Post author

      Jojo,

      With all due respect, you are falling for the bank narrative on this one.

      Yes, many subprime borrowers got in over their head. But the big resets on subprime were in 2007 and were pretty much over by late 2008. Most of those people have already been foreclosed upon, save where the banks have been dragging their feet.

      You miss the fact that a lot of foreclosures in the past and now are due to servicer errors, plus normal credit losses, the biggie being job loss or hours reductions. This is not a simple “prudent v. imprudent” story.

      When banks owned loans, they would ALWAYS restructure the loan of a viable borrower. Always. This is sound lender loss reduction behavior. Lew Ranieri, the father of mortgage backed securities, was clearly upset when he spoke at the Milken conference in 2008 about servicers using the MBS contracts as an excuse not to do mods. In his day, it was done as a matter of course because it reduced investor losses and hence was good business.

      As for the legal issues, the article makes clear that the mods do not resolve the underlying legal issues, but take stress off the system to give time to come up with solutions (and this is such a mess fast fixes are just not possible).

      One of our legal/securitization experts, MBSGuy, reacted positively to the idea as sort of a “the best half loaf you can come up with under the circumstances”:

      For mortgage loans with title or conveyance problems, they could require the borrower to reaffirm their loan, but this time with the right party, in exchange for the principal reduction. This isn’t a perfect fix – the title issue is still there, but the borrower no longer will want or need to fight the foreclosure. Thus, the trust gets “immunized” from liability as it relates to the borrower.

      Alternatively, they could refinance the loan, which would take it out of the trust, and offer a new bifurcated loan with a crammed down portion and an unsecured portion. This would require the trust to be paid off in full (and it still wouldn’t really own the proceeds of the refinance – but again there would be no one to pursue the issue in foreclosure) so the bank (and taxpayer, in all likelihood) would have to fund that 25-40% write down. This would also probably end up screwing the second lien holders (which is what should happen anyway).

      In any event, no matter what structure this idea used, someone would have to eat the 25-40% write down. The question is whether it would be the banks or the investors.

      From the senior investors stand point, taking a 25-40% principal write down would be a good deal. If the loan goes through foreclosure, the loss would probably be closer to 60-70%. The modification would hurt sub bond investors because they would stop getting interest payments on that portion.

      From the servicer’s perspective, a 25-40% principal write down might be a problem – how would they get reimbursed for all of their servicing and foreclosure expenses? This is probably the main stumbling block to the idea. In some cases, the expenses and advanced interest could be equal to close to 25% of the loan amount already.

      Of course, if they had offered principal modifications much sooner, the loss wouldn’t be as large.

      It should have been obvious a year and a half ago that the number of foreclosures was simply too large for the banks and the courts to manage. Principal modifications would have made sense at that time as a way of preventing many foreclosures. Instead, the banks insisted that they couldn’t do them because of the terms of the securitization (despite clear language in the PSA that permits modifications). While some investors could (and did – see Greenwich Financial vs. Countrywide) sue over such modifications, I suspect the main reason the servicers didn’t pursue principal modifications was because their parent companies owned such large portfolios of second liens, which would have immediately been written down to zero upon a first lien principal write down.

      Needless to say, an NYT op ed, or even an normal article, doesn’t tolerate this level of technical detail.

      1. DB Smith

        Interesting that you want to dismiss the ethical argument about deadbeats getting a free ride by asserting that we’re no longer dealing with deadbeat borrowers:

        If you are correct (you may well be!), how do you justify giving principal reductions only to some borrowers rather than to ALL borrowers?

        Surely there are legions of current (not-in-default) borrowers who are, nevertheless, caught in the title/documentation fiasco. Why aren’t you calling for those folks to get principal reductions, too? Aren’t they victims of the same bank/servicer/investor crimes?!

        1. F. Beard

          If you are correct (you may well be!), how do you justify giving principal reductions only to some borrowers rather than to ALL borrowers? DB Smith

          Don’t stop there. What about savers who were cheated of honest interest rates by the government backed counterfeiting cartel, the banks?

        2. Frank T,

          Agree, agree, agree! I wrote a six-figure check to pay down principal and still feel ripped-off by the collusion between lenders, agents, and appraisers back when the machine was hot and I simply needed to buy some extra work space close to home. Still have a large note to pay, though it is now (perhaps temporarily) no longer under water.I’d settle for an interest rate reduction now that the 10 year Treasury is 2 1/2 percent but my mortgage is 5 3/4. Thank you, Alan Greenspan and Helicopter Ben — you have created “a fine mess” and the only ones smiling are the Wall Street banksters — on, I forgot — they’re friends of yours. Well, at least we’ve put the Ayn Rand claptrap under as human nature teaches us a sharp lesson!

        3. DownSouth

          What’s it like to live in a simplistic black and white world, painting with a very big brush, creating a portrait of the universe devoid of nuance and circumstance, and reality?

          A counterargument to your Manichean construct comes from Hannah Arendt:

          Promises are the uniquely human way of ordering the future, making it predictable and reliable to the extent that this is humanly possible. And since the predictability of the future can never be absolute, promises are qualified by two essential limitations. We are bound to keep our promises provided that no unexpected circumstances arise, and provided that the mutuality inherent in all promises is not broken. There exist a great number of circumstances that may cause a promise to be broken, the most important one in our context being the general circumstance of change. And violation of the inherent mutuality of promises can also be cause by many factors, the only relevant one in our context being the failure of the established authorities to keep to the original conditions.
          –Hannah Arendt, Crises of the Republic

          Then there’s the capacity to forgive, which Arendt explores in great depth in The Promise of Politics:

          The great boldness and unique pride of this concept of forgiveness as a basic relationship between humans does not lie in the seeming reversal of the calamity of guilt and error into the possible virtues of magnanimity or solidarity. It is rather that forgiving attempts the seemingly impossible, to undo what has been done, and that it succeeds in making a new beginning where beginnings seemed to have become no longer possible. That men do not know what they are doing with respect to others, that they may intend good and achieve evil, and vice versa, and that never-the-less they aspire in action to the same fulfillment of intention that is the sign of mastership in their intercourse with natural, material things, has been the one great topic of tragedy since Greek antiquity. The tradition never lost sight of this tragic element in all action, nor failed to understand, though usually in a nonpolitical context, that forgiving is among the greatest of human virtues…

          What was lost by the tradition of political thought, and survived only in the religious tradition where it was valid for homines religiosi, was the relationship between doing and forgiving as a constitutive element of the intercourse between acting men, which was the specifically political, as distinguished from the religious, novelty in Jesus’ teachings. (The only political expression forgiveness found is the purely negative right to pardon, the prerogative of the heads of state in all civilized countries.) Action, which is primarily the beginning of something new, possesses the self-defeating quality of causing the formation of a chain of unpredictable consequences that tend to bind the actor forever. Each one of us knows that he is both actor and victim in this chain of consequences, which the ancients called “fate,” the Christians called “providence,” and we moderns arrogantly have degraded into mere chance. Forgiving is the only strictly human action that releases us and others from the chain and pattern of consequences that all action engenders; as such, forgiving is an action that guarantees the continuity of the capacity for action, for beginning anew, in every single human being who, without forgiving and being forgiven, would resemble the man in the fairy tale who is granted one wish and then forever punished with that wish’s fulfillment.

          But, as Arendt goes on to explain in The Human Condition, not everyone merits forgiveness:

          The reason for insistence on duty to forgive is clearly “for they know not what they do” and it does not apply to the extremity of crime and willed evil…

          [….]

          Here, where the deed itself dispossesses us of all power, we can indeed only repeat with Jesus: “It were better for him that a millstone were hanged about his neck, and he cast into the sea.”

          1. DB Smith

            @DownSouth

            Bombast is unhelpful and unbecoming.

            A black and white solution to the mortgage crisis exists. It’s called ‘state law’ and the solution should be exercised with vigor.

            Many will lose money. Many will go to jail. That’s how this country is SUPPOSED to work.

          2. DownSouth

            DB Smith said: “Bombast is unhelpful and unbecoming.”

            Again, you counter substance with alleged violations of form.

            And again, that is a losing rhetorical strategy.

        4. attempter

          If you are correct (you may well be!), how do you justify giving principal reductions only to some borrowers rather than to ALL borrowers?

          I suppose you’re being facetious, but Yes. Everyone should demand principal reductions and refuse to pay until those are done.

          There should be a general strike of housedebtors.

      2. Dallee

        This proposition encouraging recasting existing mortgages ignores the elephant in the room: There still would be NO proof that the borrower is dealing with a party entitled to modify the mortgage.

        Big mess.

        And, by the way, the same problem of lack of a proper paperwork chain also exists in credit card assignments.

        As I say, big mess.

        Guess those banksters got bonuses based upon an IDEA, not upon execution. Short-term performance as a basis for compensation, after all, doesn’t require consideration of how things work out over the long-term. Hey, there just is no reason for those looking only at short-term profit impact to care about what happens down the road, much less the later impact upon those directly impacted by their schemes or upon an economy or society as a whole.

        But, one has to admit, a hearty “tsk-tsk” doesn’t solve the problem … nor does asking for renegotiation with an entity without any demonstrable proper connection with the mortgage loan.

        The better answer, even if only a partial one, is to look to those mortgages with Freddie and Fannie involvement as those most suited to renegotiation and streamline such a process.

        Please put on your very fine thinking cap and refine your proposal further …

        1. Yearning to Learn

          This proposition encouraging recasting existing mortgages ignores the elephant in the room: There still would be NO proof that the borrower is dealing with a party entitled to modify the mortgage.

          indeed. that is quite the sticky wicket, isn’t it!

          I think the underlying assumption is that the vast majority of houses/mortgages really do have an identifiable “supposed noteowner”.

          if that supposed noteowner can be found, then in theory the supposed noteowner could do a deal with the borrower as Yves suggests.

          the problem of course would be if the supposed noteowner cannot be found, or if multiples exist… this problem will become more and more likely given the slight “technicalities” introduced by all these fake documents created by the banks and MERS.

          long story short: the longer we allow banks to forge documents, the worst untangling this will be later.

        2. Yves Smith Post author

          You missed the point in the long discussion in the extract from MBSGuy, who is a securitization lawyer.

          Deep principal mods means a huge reduction in borrowers fighting foreclosure. The process that is threatening to break the MBS machinery is that the foreclosure process is slowing down drastically, and at least some courts and jurisdictions are providing borrower-friendly outcomes. You mods to remove the immediate pressure and deal with the underlying mess. Trying to solve this with the huge pressure of the foreclosure machinery grinding to a halt is guaranteed to produce bad outcomes all around.

          Courts are not going to award a free house to borrowers (except in very very rare cases whether the lender has behave heinously and the judge dismissed the case with prejudice). The borrower clearly owes someone the money.

          Some courts might go the route suggested by Colin Peterson in his article on MERS, but judges have been very reluctant to go there (article here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729):

          In the short term, the harsh consequences of opinions that insist on security agreements that name an actual mortgagee could be tempered by granting the true loan owner (if it can be identitifed) an equitable mortgage. Traditionally, courts of equity were sometimes willing to imply an equitable mortgage where the parties to the transaction intended that there be security for the loan, but failed to comply with formal conveyance requirements….The sensible policy behind the rule is to give effect to the substance of the transaction rather than its form. 92 This equitable doctrine seems to fit the circumstances of MERS-as-mortgagee loans because there is no real doubt that borrowers intended to grant security interests. Generally, it is not fair, nor should reasonable borrowers expect, to receive a home for free. Awarding equitable mortgages to securitization trusts could strike a reasonable balance in the interests of borrowers and lenders without ignoring the fact that the standard security agreement does not name an actual mortgagee…..

          While awarding equitable mortgages is surely a better approach for financiers and their investors than simply invalidating liens, it would not solve all their problems. Replacing legal mortgages with equitable mortgages would give borrowers significant leverage. Historically, state law has not uniformly treated equitable mortgagees vis-à-vis other competing creditors. Generally, the holder of an equitable mortgage had priority against judgment creditors.94 But, it is likely that an equitable mortgage could be avoided in bankruptcy. 95 Moreover, it is likely that financiers would have less luck seeking deficiency judgments when foreclosing on equitable mortgages. Perhaps most important, as financiers bargain in the shadow of losing their legal mortgage, they might well come to the negotiating table more inclined to offer realistic modification agreements. The judicial threat of invalidating mortgages and replacing them with less tactically useful equitable mortgages could decrease court’s dockets by forcing securitization trustees and servicers to the negotiating table.

          So again we wind up with modification negotiations, most likely principal mods given borrower leverage. The lawyers fighting foreclosures also want meaningful mods.

          Any solution will be negotiated and messy. This is such a massive screwup no clean outcome is possible. And the hallmark of a good negotiation (and you will not like hearing this) is everyone is somewhat unhappy but decides to live with it and move on. If you are at the negotiating table, it usually means you couldn’t find a win/win and are trying to find a way to sort out who takes what type of pain.

          1. Jojo

            “Deep principal mods means a huge reduction in borrowers fighting foreclosure.”

            Agreed. But it doesn’t SOLVE the problem, just rewards those who are getting foreclosed upon. And I assume that they are getting foreclosed upon for a valid reason in the first place.

            The process that is threatening to break the MBS machinery is that the foreclosure process is slowing down drastically, and at least some courts and jurisdictions are providing borrower-friendly outcomes.

            Tough. Get the paperwork in order then.

            You mods to remove the immediate pressure and deal with the underlying mess. Trying to solve this with the huge pressure of the foreclosure machinery grinding to a halt is guaranteed to produce bad outcomes all around.

            Principle reduction IS a bad solution all around. Again, it rewards some at the expense of others.

            I’m sorry, but you are sounding more like a politician searching for an expedient solution that is most favorable to the bad actors in this morality play – the banks and those who have gotten themselves into a situation that has resulted in the banks desire to foreclose on them.

          2. Yves Smith Post author

            Jojo,

            You REALLY don’t get it, do you? You are omitting all sorts of facts to come to your conclusion.

            1. INVESTORS favor mods. If INVESTORS who have their money at risk want mods, what is your beef? They are faced with 70% losses on a foreclosure versus 25-40% on a mod if the borrower is viable (you omit that part too, that I stress mods to viable borrowers, no point in offering a mod if the borrower is a real goner).

            2. Due to 1., banks historically would also give mods for the same reason, better to take a smaller loss than a bigger one.

            3. Contrary to your considerable prejudices on this matter, people who can’t afford their house don’t fight. The only reason some are sticking around to live in them after they’ve defaulted is because the BANKS are slow to foreclose. Why? Because the BANKS have tons of houses to sell already (as in they have an inventory overhang now) and they want the owner on the hook for the real estate taxes.

            The people who ARE fighting are either victims of servicing errors and abuses (which includes banks trying to break bankruptcy stays, a topic I’ve addresses longer form in posts) or people who are in mod programs where the bank is too stupid or venal to stop the foreclosure (ie, the bank is gaming HAMP).

            The only people who are parties to this deal who don’t want mods are the servicers (and the foreclosures mils in their employ) and junior bond investors who are being advanced principal and interest on loans that are delinquent (ie that puts them in the same camp as the servicers). These investors represent a very small % of the total value of the deal and many of the current owners are distressed debt investors and already have gains in the paper, thanks to Fed interest rate policies. Servicers do much better in a foreclosure scenario, they get lots of fees plus collect some, hopefully all, of their principal and interest advances. But the investors ALSO get stuck with the cost of fighting the foreclosures, when it isn’t clear they should (particularly in the case of servicing errors, which is a big driver of foreclosures now).

      3. Nobby

        There is a point here which I would like to seek some clarity on. If the banks admit there problems with a number of mortgages in a trust, don’t the investors have the right to declare an event of default under the PSA, as there has been a breach of the reps and warranties. Therefore, the idea that the putbacks are going to happen slowly, with each mortgage being contested by the banks, seems false, but rather there will be a large number of deals coming back all at the same time?

      4. Patriot

        Hi Yves,
        I have seen at least one PSA where the servicer was forbidden to make any modifications. It could set up forbearances, but my reading was that the servicer could not do a principle write down.

        1. Yves Smith Post author

          Congress passed HR 788. I need to read it carefully, but it was intended to provide a safe harbor for servicers to do mods. And you didn’t see any servicers arguing with HAMP that they were restricted by the PSA.

      5. Justicia

        Yves,

        What about the idea of the banks taking an equity stake in the property equal to the amount of the write-down. If the home is eventually sold at a profit (above the adjusted principal amount of the mortgage) the bank gets its money. If the property is underwater and there’s a deficiency, the bank takes the loss.

        As to the fairness or “moral” objection that some have raised to giving a break to distressed homeowners and not all homeowners — Jewish law provides for a sabbatical or “jubilee” every seven years in which all debts are forgiven. Leviticus 17-26 This was both an economic and moral re-set for the whole society.

      6. Karen

        “As for the legal issues, the article makes clear that the mods do not resolve the underlying legal issues, but take stress off the system to give time to come up with solutions (and this is such a mess fast fixes are just not possible).”

        Correct me if I’m wrong, but wouldn’t the exact same legal issues that are blocking foreclosures also apply to the right to agree on a mortgage modification?

        What would happen if Wells Fargo negotiated a mod and then JP Morgan Chase stepped forward (in complete ignorance of Wells Fargo’s competing claim to the same mortgage) to attempt either its own mod negotiation or a foreclosure? The same mess, no?

        Seems to me a better idea would be for the government to establish a resolution authority/central registry.

        – All proposed mortgage modifications and foreclosures would have to go through this central portal.

        – The first claimant to prove the existence of a valid mortgage obligation, and to sign an affidavit that it believes in good faith that it owns that mortgage obligation, would be allowed to proceed with a foreclosure or modification.

        – Before any action could be taken, someone would have to be found to represent the interests of the holders of all other obligations that appear on the property’s title (obtained by search of county property records), such as second mortgages/HELOCs, delinquent property taxes, or unpaid contractors (who had filed mechanic’s liens). Maybe there could be public advertisement to try to get the parties to step forward, and then when that failed a central registry employed lawyer could fill that role – ?

        – If at any point another claimant steps forward with all the documents needed to foreclose under existing law (i.e. solid proof that it is the “real” owner), control of the process would pass immediately to that claimant.

        – If no such claimant with proof steps forward, then the proceeds of the foreclosure sale or modified loan would be deposited into an escrow account where they would have to remain for several years before being released to the foreclosing or mod-negotiating lender.

        – All competing claims on the same mortgage that show up during the escrow period would then be adjudicated, and the escrowed funds distributed as fairly as possible. All fraud that was thus revealed would also be prosecuted (against the individuals who committed the frauds).

        By separating the question of whether a valid mortgage obligation exists on which the borrower promised to pay from the question of which entity is the true owner of that promise to pay, the housing market could move forward unencumbered by the latter issue and nobody would be harassed by multiple lenders.

        And frauds committed during the securitization process could be prosecuted based on the evidence collected at this central registry.

      7. michael

        Yves, you say, correctly:
        From the senior investors stand point, taking a 25-40% principal write down would be a good deal. If the loan goes through foreclosure, the loss would probably be closer to 60-70%. The modification would hurt sub bond investors because they would stop getting interest payments on that portion.

        From the servicer’s perspective, a 25-40% principal write down might be a problem – how would they get reimbursed for all of their servicing and foreclosure expenses? This is probably the main stumbling block to the idea. In some cases, the expenses and advanced interest could be equal to close to 25% of the loan amount already.”

        it is very hard for my to imagine, given the climate, that all parties are not holding out for the gov[t to kick in a significant portion of these amounts. this, in my view, is the more likely reason nothing real will happen for some time.
        taking these losses and removing the illusions of profit from the books of corporate america (pension funds included to large portion) is just not the current american way. rather, kick the can down the road, vote in gridlock, have the regulators write up something inthe back room, push it out there with either no media coverage or media support and bingo, losses magically don’t exist.
        or, assign or ‘sell’ all the mbs to the FED or g’vt owned agencies (fanny et al) and bingo, the tax payer is on the hook after all.
        FURTHER, when will the regulating agencies see the problem of allowing the creation of conflicting interests involved in the same financial instruments. obviously the CDS story with AIG (GS et al) did not make a dent in the willingness to continue the involment of ‘investors’ and ‘servicers’ in the same money stream. (insert appropriate names in each category)
        is it just too much to ask that deals must meet the ‘who is clearly accountable from beginning to end” test?? oh ya, there is not such test anymore…maybe never was one

        1. Yves Smith Post author

          The banks with big servicing arms wind up back in the TARP. Someone is going to eat the losses. This time, the public needs to make sure that a lot of senior head roll. The big banks claimed they were essential and competent, when the evidence strongly suggests the only thing they were competent at is being crooks and reckless cost cutters.

          The Administration tried extend and pretend with losses on mortgage paper, that game is about to come to an end. These losses already exist (the industry is going to try to persuade you otherwise). But the authorities hoped that if they kicked the can down the road far enough, the economy and therefore the housing market would recover, and hence the losses would never be realized, or at worst, not very much.

          This was always bogus reasoning:

          1. Housing was wildly overvalues relative to incomes and rentals. Even if we got back to pre-bust levels of GDP and employment, but sustainable housing valuations, home prices would be much lower

          2. The quality of bank balance sheets and the economy are interdependent. Banks won’t lend (to anything other than super safe borrowers, when those aren’t the types that create much in the way of jobs) as long at their balances sheets still have meaningful levels of bad assets on them. So assuming the economy would heal when you hadn’t cleaned up the banks was also bogus (witness Japan).

        2. dejavuagain

          “the creation of conflicting interests involved in the same financial instruments. … the involvement of ‘investors’ and ’servicers’ in the same money stream. (insert appropriate names in each category)”

          As the mess is worked out, one thing is to think about proposals as to how to keep this from happening again. Eliminating these conflicts is important – especially the servicer conflict. One suggestion is ending the practice of servicers advancing cash flows to the mortgage holders. Servicers should provided administrative services only – let the sponsor of the MBS pools guarantee the cash flow, or, if not legally possible, have the servicers only advance cash received.

          Another regulation would be that no servicer could be owned by a entity that provides second lien financing.

          Of course, MERS role should be reduced. One role would be to provide an identification number for each mortgage cross-reference to the recording information of the original mortgage. A second role would be to provide references to other instruments recorded as to the mortgage, and perhaps to provide facsimiles of recorded documents with the recordation stamps etc. But, MERS should have not be permitted to record mortgages in its name in any capacity. In addition, the MERS database should be public – at no charge. The lenders can fund the costs of running MERS.

  7. Allen C

    Nice work. Nice of the NYT to print it.

    The large bank’s insolvencies are likely impossible to hide deploying your recommendation. If the banks are insolvent then folks may look closer at the backstop.

  8. sam

    Fabricated documents. Apparently the banking industry has become a criminal enterprise that would shame the Mafia.

    1. Frank T,

      Perhaps this is the alternative to TARP and the Fed’s manipulation. Have DOJ prosecute MERS and the big banks under RICO. The new owners would be the US taxpayers, who paid for this anyway, and set up white collar gulags for the bank fraudsters. Then schedule recasting on a huge scale and start over.

  9. dearieme

    “major principle modifications” is Mr Obama’s forte: Yves was discussing principal modifications.

  10. DownSouth

    The sentence that caught my eye was: “Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?”

    Unfortunately, given that orgy-of-nihilism we now call Congress, I think the answer is a qualified “yes.” Qualified because Congress will do the wrong thing if it doesn’t perceive the cost to be too high.

    Given the way campaigns are run and financed these days, it has become increasingly difficult for everyday Americans to inflict any “cost” upon Congress. The cost of defying the whims of big corporations, however, is immediate and severe.

    Somebody yesterday mentioned convening a consitutional convention to try to correct these obvious flaws in the way we do politics in the United States. I think this might be a good idea, and is certainly in the spirit of Thomas Jefferson and some of the other Founding Fathers.

    Congradulations Yves. You’ve worked very hard, and I wish you all the success in the world.

  11. George999x

    Congratulations Yves – great piece. I have a suspicion that my own biases make me view the NYT as “mainstream coverage” a little more than it actually does constitute mainstream coverage.

    Where next to get an even wider audience? The basic premise here will surely continue to resonate, much more so (unfortunately) than “Banks wrote these rules” or even your nice Econned annexe…

  12. Ted K

    Yves,
    I don’t have an opinion on the NYT piece as I haven’t read it yet, and my guess is even after I read I’ll want to think about it a little. But I have to say as much as you like to “ride herd” on Gretchen Morgenson, I’m mildly surprised they let you give your 2 cents in there. I’m not saying it’s wrong for them to let you have some space there, just it doesn’t follow a lot of the media’s usual “modus operandi”.

    1. Yves Smith Post author

      The op ed pages have a completely different edit staff than the news pages. The big limitations with op eds are space constraints and that you are writing for an even more generalist audience than the business section. I was actually surprised and pleased that they let me put in as much technical detail and gave me as much space (a couple of hundred words above the usual length) as they did.

      1. Pwelder

        I see your point about the separate op-ed editorial staff, but there is still room for conjecture as to why the NYT ran with your piece and gave you some extra leeway. Some possibilities:

        1) It’s a fine op-ed: Fact and comment by an informed observer on an important subject that is not widely understood.

        2) Reporters on their news side might not have seen a way to develop the story without burning their sources. Now it’s out there on the op-ed page, they can call around mid-town and Wall Street inviting people to take their best shot at debunking it.

        3) And anyway, it’s Halloween! :>)

      2. Ted K

        Yves,
        I don’t know if you respond to stuff this far back in your comment threads, but I would appreciate an answer to this, even if it is a short answer. I think Gretchen Morgenson is basically a good person. The person who really gripes my ass at NYT is Andrew Sorkin. What are your thoughts on Sorkin??? He seems way too cozy with the bankers ( to the point of compromising journalistic integrity).

        A short but honest/somewhat blunt response would be appreciated.

        1. Yves Smith Post author

          Morgenson’s intentions are good, her problem is she doesn’t know her limits. She is very good on anything in the equity markets, executive comp, and usually when there is litigation (as in she can read court documents). She isn’t as knowledgeable in the credit markets, and her sometimes off target salvos play into the hand of both banksters (who can play finance pedant and use her errors to discredit her) and others who simply care about accuracy (Tanta and Felix Salmon have often savaged her articles).

          Sorkin is a mouthpiece of Wall Street, and worse the Times sets him up as a model by making him their highest paid reporter(!). 9 articles out of 10 are dependent on access, and therefore come dangerously close to dictation. The remaining one is somewhat critical to maintain the appearance of independence.

          1. Ted K

            A lot of bloggers wouldn’t have answered that question as honestly/frankly as you did. I respect you for that, and I would venture to guess many of your readers respect you for those honest/forthcoming answers as well. I so happen to believe it’s 100% accurate in this case.

  13. charles

    Congrats, very fine piece. However, but maybe is not possible within the framework of an Oped, since I have seen it in Simon Johnson’s Economix contributions, imho, the piece should link to the criminogenic aspect of the process and I am thinking of the two pieces co-signed by you country’s best financial detectives,a.ka. Bill Black and George Washington, which in my view, have not received the
    adequate attention

    Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership

    http://www.huffingtonpost.com/william-k-black/foreclose-on-the-foreclos_b_772434.html

    Foreclose on the Foreclosure Fraudsters, Part 2: Spurious Arguments Against Holding the Fraudsters Accountable

    http://www.huffingtonpost.com/william-k-black/post_1115_b_772820.html

    And for overseas readers,less familiar with the technicalities, the series of posts by Mike Konzai

    Foreclosure Fraud For Dummies, 1: The Chains and the Stakes

    http://rortybomb.wordpress.com/2010/10/08/foreclosure-fraud-for-dummies-1-the-chains-and-the-stakes/

    Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important?

    http://rortybomb.wordpress.com/2010/10/11/foreclosure-fraud-for-dummies-2-what-is-a-note-and-why-is-it-so-important/

    Foreclosure Fraud For Dummies, 3: Why Are Servicers So Bad At Their Job?

    http://rortybomb.wordpress.com/2010/10/11/foreclosure-fraud-for-dummies-3-why-are-servicers-so-bad-at-their-job/

    Foreclosure Fraud For Dummies, 4: How Could This Explode into a Systemic Crisis?

    http://rortybomb.wordpress.com/2010/10/11/foreclosure-fraud-for-dummies-4-how-could-this-explode-into-a-systemic-crisis/

    Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis

    http://rortybomb.wordpress.com/2010/10/12/foreclosure-fraud-for-dummies-5-the-necessity-of-government-action-and-ways-out-of-the-crisis/

  14. Kris Merschrod

    Ives,
    Crimes have been committed – lawyers, bankers, trusts, etc. have collaborated in this mess. The folks who dreamed it it up have been co-conspirators. The “system” was destroyed – and you want to make it go away with some sort of adjustment for those who are able to meet mortgage payments? Isn’t that what you railed against when it came to the bankers wishing for Congress to make it all go away?

    Send the criminals to jail, use the fines to compensate the victums; if paper can’t be found – a free ride for the home owners – give them a windfall and a chance to reduce their cost of living.

  15. Ben

    A major sticking point for the idea of trading principal modifications for loan reaffirmations could be the multitude of “good” mortgages that have been improperly securitized. Won’t those mortgages need to be corrected as well? Will those homeowners just sit back while their neighbors have their principal and payments reduced?

    I am one of those homeowners who bought a home well within my means and whose mortgage is still above-water. I have lost a significant chunk of the downpayment I put into the house when I bought it. Though I try to be a rational, “for the greater good” type of person, it would be hard for me to sign a “reaffirmation” of my loan without getting something in return. In the grand scheme of things, I understand that what I might be getting in return is a firming of house prices in my neighborhood and a more stable economy. But my neighbor would be getting those things, PLUS a reduction in principal and payments. And I know intuitively that the bank would not be nearly so understanding toward me if I were the one who had committed fraud during the mortgage process. If the losses to the banks are huge when they write down the principal on only underwater mortgages, imagine how big the losses will be if EVERYONE wants their principal reduced.

    It is very difficult to be unemotional on the whole fraudclosure issue. My desire for justice to be served is so strong that a large part of me is willing to take on much greater economic hardship if it means the banks get what they deserve. I know that as an average joe, if I were to be found guilty of forging ONE notarization, the legal consequences would be very unpleasant. The banks’ conduct is fraud on a colossal scale, and it must not go unpunished.

    1. DB Smith

      Ben,

      I think you have nailed the critical flaw in Yves’ proposed “solution” to this mess — instead of enforcing existing laws and letting the chips fall where they may, i.e. the banks/investors taking full loss/responsibility for their documentation/procedural failures, Yves (and u.a. Felix Salmon) want to give the banks and investors a ‘1/2 a loaf is better than none’ compromise.

      With respect to Yves and Felix, when did we see the banks/investors offering borrowers any quarter? As Yves, herself, notes, the banks have totally resisted ANY kind of compromise solution for borrowers and that’s why (in large measure) the crisis has become acute!

      As you correctly observe, giving principal reductions to defaulted borrowers, but not to current borrowers (who are likely in the same boat from a title/documentation perspective) is just wrong; it’s inequitable and morally repugnant.

      Would be interested to get Yves’ take on this…

      1. Patricia

        What you can’t seem to get through your head, DB, is that the *whole* thing, top to bottom, has become “inequitable and morally repugnant”. Huge damage has been done–innocent people have taken losses and are going to take more losses. There is no way to restore it back to perfect fairness. That is how it goes when huge wrongs occur in this world.

        I paid cash for my house and have lost 95,000 outright and I need to move. My cash was inheritance money from my family given because I am a disabled person. Would you, out of a sense of absolute justice, get me back that 95,000? God knows I need it. Yet it can’t be done. People pay for others’ wrongs, that’s how it is.

        We now must try to find a way to correct the situation as best we can. Even best case scenario will only restore justice going forward and mitigate some injustice that has been done. In doing that, some unsavory people will get something they shouldn’t, some innocent people will not get something they need.

        I am willing to lose this money for the sake of the larger community, for the sake of the future health of this nation. For the sake of our children. Not because I’m a schmuck, not because I’m passive or stupid, but because more than I want my “just desserts”, I want

      2. Patricia

        What you can’t seem to get through your head, DB, is that the *whole* thing, top to bottom, has become “inequitable and morally repugnant”. Huge damage has been done–innocent people have taken losses and are going to take more losses. There is no way to restore it back to perfect fairness. That is how it goes when huge wrongs occur in this world.

        I paid cash for my house and have lost 95,000 outright and I need to move and haven’t enough for another house. My cash was inheritance money from my family given because I am a disabled person. Would you, out of a sense of absolute justice, get me back that 95,000? God knows I need it. Yet it can’t be done. People pay for others’ wrongs, that’s how it is.

        We now must try to find a way to correct the situation as best we can. Even best case scenario will only restore justice going forward and mitigate some injustice that has been done. In doing that, some unsavory people will get something they shouldn’t, some innocent people will not get something they need.

        I am reconciled to this money loss, not because I’m a schmuck, not because I’m passive or stupid, but because more than I want my personal “just desserts”, I want health for the larger community, and for the stability of our children’s lives. And this is the price I have to pay. Que sera.

  16. anon

    “But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code.”

    just wondering if that’s what you intended, or is there a typo?

    1. Yves Smith Post author

      I wanted the sentence to read differently (as in the UCC is actually state law too, a pretty standard code adopted in every state; I though this formulation could be interpreted by readers to mean otherwise) but the NYT wanted this way of wording it, both the editor and copy editor thought it did not muff the state law issue.

  17. Noash

    Nice piece Yves! I will be sharing with my friends.

    It’s amazing how many people have no idea how far this goes. Having your piece in the NY Times Op Ed is a beginning. I don’t know whether the media has their head in the sand on this or if they are still doing their homework (a little behind the eight ball I would say). Either way, I’m glad they gave you the space.

    I was just explaining it to a friend and she was absolutely shocked at the degree to which the banks went to save their hind-ends, even though I have been posting stuff on my Facebook page for months now! The media is complicit in this farce until they expose the lies to the general public. Maybe this is the beginning.

  18. David

    From what I can tell, you are saying because the loan was improperly securitized (a very debatable point), the original contract between borrower and lender is null and void.

    The implications of your recommendation are completely irresponsible. I’m guessing that is ok with you because ultimately, your reasoning must go, anything is better than the current economic system we live under.

    1. Barbara Astone

      David,

      It is the current economic system that is protected by requiring all sides to abide by contract law. Defending a bank when it illegally tries to foreclose only undermines that system.

      You need to recognize that in this mortgage mess the banks and mortgage servicers — not the borrowers! — have perpetrated a HUGE FRAUD on the American people. (And don’t let the relatively small percent of people who got “liar’s loans” confuse the issue here.)

      In their frenzy for easy profits, the big banks and their middlemen corrupted a mortgage system that used to work for everyone — borrowers and lenders both — and turned it into a rapacious con game, where only lenders and middlemen gained, and borrowers and home-owners — all of us — lost. (Yes, some people knowingly took out loans they couldn’t afford, and those people should face foreclosure when the actual lender is identified. But that is a side issue compared to the gigantic and organized corruption of the banks and servicers, which has harmed all of us. Focusing on people who took out too-big mortgages only distracts you from the real issue. They are not the problem.)

      I sympathize with Ben, above, who’s still making payments but lost most of his equity when prices fell. But don’t forget the growing number who, like Ben, lost their equity, but now have also lost their jobs, so they can’t even make their payments.

      The housing bubble was created by a corruption of the system. It has cost ordinary Americans a great deal of pain that hasn’t hit bottom yet, and turning on one another instead of focusing on the real issue will not serve the interests or ordinary Americans.

      We need to hold the big banks accountable, and if that means they go under, then so be it. The government (which is us) has the ability to do it in an orderly way. And we need to prosecute whoever broke the law, so it doesn’t happen again.

      If we don’t do these things, then we definitely will be undermining our system. Capitalism is not corporatism. And capitalism, being a blind economic means to an end, is not democracy. You need a government if you want to have a democracy, but an uncorrupted government, which is a constant struggle to maintain.

      So we all need to keep our eyes on the ball and not get distracted by side issues. Government that works in the interest of the public (not just corporations), and rule of law for everyone, including corporations.

    2. attempter

      you are saying because the loan was improperly securitized (a very debatable point), the original contract between borrower and lender is null and void.

      The implications of your recommendation are completely irresponsible.

      1. You got it mixed up. That the loan was improperly securitized affects the contract between seller and investor. It’s the separation of the note and the lien which voids the contract between borrower and lender.

      2. What lender? Who’s the lender? Do you know? I don’t. The procedures were set up so everyone could always tell who the legal lender was. He identifired himself by his possession of the unified note and lien. How does he identify himself today? How do you know the guy who says he’s from a bank and he’s here to foreclose has any right to do any such thing? You better just refuse to pay until he Shows the Note.

      And everyone should demand to See the Note no matter what their status – underwater or not, distressed or not, etc.

    3. Yves Smith Post author

      Please read my comment of 4:08 (it’s pretty long, scroll up for the long comment). There is solid legal reasoning underpinning why this comes out this way.

      The constraints of an op ed (space and need to write for complete laypeople) preclude giving all the underpinnings of the reasoning. But you come out guns a blazing and accuse me of not having them, and by implication, of not having done my homework.

  19. Judas I.

    Congratulations! As a long time follower of your blog, I am delighted to see you on the New York Times’ op-ed page once again. The fact that your voice is now being heard by more mainstream audiences raises my hope that the fraud and corruption you have been covering so diligently will now be more widely recognized by us ordinary citizens who tend to discount the ability of those in power to do truly evil and incompetent things.

    I do have one concern and it is simple and fundamental: You may well be on your way to much greater fame and fortune in our talking heads (this is not a reference to David Byrne) media obsessed world. This is a distinctly two edged sword: The more the folks in charge admit you into their club, the broader your access to we the people (good) but the greater the pressure to conform to the norms that govern what passes itself off as journalism and serious discussion these days (bad).

    Be careful of the road ahead if you value the truth as much as I hope and believe you do.

  20. Yearning to Learn

    well done Yves. It was great to read how you parsed your last 2 years of posts down into one NYT op-ed!

    as for the content, I agree with most of what you say, except the big sticking point is this;

    The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program.

    bingo. combine this with the CDS problem (which is still out there) which will magnify the losses x-fold, and this makes this politically undoable right now. it could have been done when the Dems took control of congress/administration and there was high anti-bank “populist” sentiment… but not now. we are too far into bailout fatigue, and the Dem-Repub conflict will only get worse the next 2 years. the only bailouts allowed are backdoor bailouts. (like ZIRP, QE2, etc)

    ===
    as Ben and DB Smith also note: this process is difficult because humans are not rational. We are emotional beings with a strong case of “right vs wrong” and moreso of “fair”.

    it just isn’t “fair” for some people to get mods when others don’t. Obviously, your argument is rational (or at least rationalizable), but it just stinks to high heaven of unfairness. my rational brain says “yves is right” but my emotional side screams NOOOOOO.

    There would have to be a way to make people forget the unfairness… in other words a sacrifice or scapegoat. e.g., if someone could start prosecuting the banks and banks staff… this would direct anger at the banks and shift attention away from the “deadbeats” who would now be called “victims”.

    ====
    lastly, although your solution does help with the ECONOMIC issues at hand, it still leaves a LEGAL problem.
    the banks have unilaterally trashed 200+ years of established real estate laws. do we “look forward and not backward” on that? what is to stop them (or other entities) from simply doing this again?

    part of the solution MUST be punishment.

    1. DB Smith

      Absolutely agree that “part of the solution must be punishment”!

      Two years ago we taxpayers were told to ‘look ahead’ when successive administrations spent billions upon billions of our money to bailout pretty much every bank in the country — even many who didn’t really need the money but gladly took it, anyway.

      “Look ahead”, the politicians said, “we’re protecting you from the end of the world”. “Plenty of time, later, to talk about blame.”

      Well, what did ‘look ahead’ give us? No prosecutions, no convictions, bigger bank bonuses, government-owned GM buying a finance company so it can make sub-prime loans, all of the same executives in all of the same jobs (or comfortably retired with multi-million $$$ payouts).

      The banks, corporations and Wall Street have rewarded us for our help by going back to business-as-usual as quickly as possible. Not so much as a “sorry”, let alone any kind of tangible penance.

      Sorry, but I’m tired of “look ahead, not back”; I want retribution. Better yet, I want reimbursement for the retirement income Mr. Obama has stolen from me with his ZIRP.

      Sorry for the rant.

      1. Frank T,

        DB, your rant was right on the money (now that we are paying for the wretched excesses of Washington and Wall Street as banks rebuild capital with ZIRP) and we get to sit on our retirement savings for stingy interest income from the same banking cartel that gouges us if we need to borrow and God help you if you go into overdraft. I still am amazed that they have the gall to charge one point for a 4.25 mortgage “origination.”

      2. John

        You can’t ignore what no prosecutions means: the criminality of our government.

        Rule of law only exists in this country for “the little people”.

        The real criminals, the elite, our “leaders”, are above it.

  21. Fractal

    I have to run out so I didn’t read all the comments, yet. I just need to say that Yves Smith is my hero.

  22. maynardGkeynes

    If taxpayer money is not involved, is there a moral hazard issue in doing these mods? If not, why should anyone care how private parties resolve their private financial disputes? The only issue I see then is the one that would have externality effects, the clouding of titles by the poor paperwork. Unfortunately, Yves’ essay seems to kick this one down the road. I don’t think I would buy any home that was financed from about 2003 on, even if the buyer has not been foreclosed. You are taking too big a risk. Title insurance might mitigate this, but even then, the Title Insurance industry may not be able to pay, much like MBIA and Amabac were unable to pay out large numbers of defaults. So this could really gum up even a healthy housing market.

  23. Bud in PA

    The greatest deterent to crime is the certainty of punishment. Moral hazzard, in all forms, will continue in this country until we, as a people, get back to the fundamental understating that we are first and foremost a nation of laws.

    1. maynardGkeynes

      @Bud in PA: Tell that to the Native Americans. The fraud and abuse of the law we see by the banks is as American as cherry pie.

      1. DB Smith

        Don’t know which Native Americans you’re referring to but I can tell you that, here in western New York State, the Seneca Nation has learned how to exploit the legal system and money politics just as effectively as any bank.

        Off-topic, I know, but, if you want to cast modern-day Native Americans as victims, you need to be a bit more specific about which tribes.

        Here in New York State, the Indians do just fine, thanks.

        1. John

          He’s probably talking about the original native Americans which we stole a continent from and killed millions along the way.

          Why are you complaining about the current ones?

          As the saying goes: if you can’t beat um, join um.

    2. F. Beard

      … get back to the fundamental understating that we are first and foremost a nation of laws. Bud in PA

      Whose monetary system is based on government backed, systematic theft of purchasing power from all money holders including and especially the poor by the banks via money creation.

      Talk about a foundation of sand! Actually, filthy muck is more accurate.

  24. Avg John

    For the folks who stayed dry during the first wave and want to hurry up and remove the debris, just remember, it ain’t over yet.

    1. attempter

      They all built their sand castles below the tide line at extreme low tide, and now that the tide’s coming back in the ones who were further back are castigating those already inundated for having been “imprudent”.

      But the tide keeps coming.

  25. DB Smith

    Curious to know why you say that it is “debatable” that there was any improper securitization of mortgages?

    There have been multiple reports, from unrelated sources, that (a) many mortgage notes were actually destroyed and (b) almost no notes were correctly conveyed (by endorsement) to their respective trusts.

    Are all of these unrelated parties lying? To what end?!

    If I go into court and claim repayment of a debt, the judge is going to (rightly) ask me to show him/her the promissory note. If I don’t have it, I’m not going to win my claim (and I’ll probably have to pay the other party’s costs!).

    Why should banks/MBS investors/loan servicers be treated differently from the rest of us?!

  26. Yearning to Learn

    From what I can tell, you are saying because the loan was improperly securitized (a very debatable point), the original contract between borrower and lender is null and void.

    your comprehension is incomplete. IMO there are two distinct ideas.

    let’s start with one idea:
    a contract is a legal construct.
    If things are not done according to the law, there is no contract. Iin other words, legally there might not be an “original contract”.

    this does NOT mean that the borrower gets a free home, or that there is no financial relationship between borrower and investor however…

    here are just two of several possibilities:

    1)
    The supposed/assumed note-owner may not truly be legally the note-owner. The legal standing is of course important. the only way to extinguish the lien is to pay off the LEGAL note-owner. if the supposed note-owner is not the legal note-owner, then there never was a contract between borrower and supposed note-owner to begin with.
    That does not mean that the borrower is scott free. They then have a lien on their house by another entity. (the “unrecognized note-owner”).

    2)
    breaking the rules of securitization do not necessarily mean that the borrower and supposed note-owner have NO contract, just that the terms are different than assumed.
    The borrower would owe the supposed note-owner money on an UNSECURED note.

    it is important to sort this out. Take me for instance. I am not a deadbeat. I can easily afford my home. I have a small mortgage through (I think) Wells Fargo that I pay every month, and hope to pay off at some point.

    but what if I am paying money to Wells Fargo and later I find out that they don’t legally own the note? what if they sold it to BofA, but I was never notified? in this case when I pay off the mortgage to Wells Fargo I still am at risk for foreclosure from BofA!

    there are documented cases of this exact problem happening (people being foreclosed upon by several different entities).

    this issue is more than about deadbeats and “paperwork problems”. it is about establishing and proving who has the LEGAL RIGHTS to YOUR property.

    the banks have screwed this up… we KNOW it because there are 100,000’s of thousands of FORGED documents in our court systems.

    1. Yves Smith Post author

      First, the note the borrower signed with the lender is still valid. Notes are negotiable and can be transferred. So the borrower DOES CLEARLY STILL owe money. This is not disputed. The problem is with the mortgage backed securitization. Having not gotten the note to the trust for the securitization in the manner stipulated, it is well nigh impossible to fix it after the fact.

      Second, please read my comment at 4:08 PM. It’s pretty long, so scroll back looking for long comments.

  27. escariot

    Just want to chime in here on a front lines observation. This is in regards to the notion of deadbeat borrowers. Before this mess, we had people who got in trouble with their mortgages due to job losses, death in the family, divorce whatever, the first thing they did (and many still do) is accept the fact they can’t afford the place they live anymore and put it up for sale.

    Alas. This is no longer an option for MOST of these folks. The prices are (in our market in FL) 60% off the high. These people couldn’t pay their mortgage balance even IF they found a buyer. And the buyers are few, and they want and expect, and get deep discounts.

    So these people are screwed. And all they did wrong is buy a house. Something everyone used to say was the only smart thing to do.

    So from that place, from this perspective, the write downs make sense to me. Of course with QE2 the Treasury may be inflating folks out anyway without all the legal hassle. Something clearly has to give.

    1. F. Beard

      Of course with QE2 the Treasury may be inflating folks out anyway without all the legal hassle. escariot

      Huh? What’s to say we won’t get stagflation instead?

      The US Treasury should bypass the middlemen and send EVERY American adult a huge check of new debt and interest free legal tender fiat, United States Notes, COMBINED with leverage restrictions on the banks to preclude an inflationary spiral.

      Let’s replace phony bank money (credit) with real legal tender and bailout the population in the process of doing so.

      Still, who would the debtors pay with their windfall as some have significantly pointed out?

      Ah, what a pickle. And it couldn’t happen to a nicer monetary system, the government backed counterfeiting cartel.

      1. DownSouth

        F Beard said: “What’s to say we won’t get stagflation instead?”

        Stagflation is a definite possibility. It was with the prediction of stagflation in the 1970s that Milton Friedman, along with Edmund S. Phelps, polished their credentials by being so prescient.

        But whether QE2 yields stagflation or inflation is irrelevant to escariots statement. Both would result in “inflating folks out.”

        But what if QE2 doesn’t produce inflation or stagflation? Is that a possibility? And if so, what then?

        1. F. Beard

          Both would result in “inflating folks out.” DownSouth

          Not necessarily. If one’s income does not go up then inflation only harms a person. QE2 may simply go into commodity speculation. Speaking of which, as if the banks aren’t cursed enough already:

          He who withholds grain, the people will curse him, but blessing will be on the head of him who sells it. Proverbs 11:26

          The bankers may be forced into increasingly desperate (and despicable) behavior. Serves em right.

          1. Yves Smith Post author

            Commodities markets are actually small compared to financial asset markets. That’s one reason we saw such a rapid run up in the first half of 2008. It does not take a lot of speculative money going into them to push prices around.

            In addition, in the 1970s stagflation, you did see a lot of home price appreciation. You can Google to find the details.

    2. DB Smith

      If you buy stock on margin and the market falls, your broker isn’t going to write down your debt.

      Your new car, financed by GM, loses 20-30% of its value when you drive it off the lot. Does your auto loan get reduced?!

      I’m tired of being told that I should subsidize someone else’s bad decisions.

      I have enough problems taking care of my own mistakes, thanks very much.

  28. Jackrabbit

    Who takes the losses on a write-down? The banks or the investors? Why would investors agree? They were not at fault AND the “empty box” problem (Trust doesn’t own the Note) which gives a homeowners leverage for principal reduction also gives investors good cause for recouping losses.

    Moral hazard continues to be a real concern. Those who were responsible for “robo-signers” and other who broke the law should not be given a free pass. We need to see serious fines, disbarment, and jail time for these criminals. Otherwise we send the message that its OK to break the law if you’re doing so on behalf of a bank. I’d like to see claw-backs and firing of executives too.

    It seems that the Obama Administration’s “TARP is a success” BS will come back to haunt them!!!!

    1. Yves Smith Post author

      Investors (save sub bond investors, who represent a small proportion of the total value of MBS deals and benefit from delays in foreclosure) are very much in favor of mods for viable borrowers (and I stress viable, you do need to screen to ascertain income and their level of other expenses, including other recurring debt payments). They face 60-70% losses on foreclosure. 25-40% principal mods leaves them very much ahead.

      1. Jackrabbit

        Yves,

        I understand why investors would ordinarily be happy with mods (in the right situation) , but don’t the problems with the Trust change the calculus here?

        ]If the investor choice is:
        a) make the case that the Trust is void due to non-conveyance of the Notes, OR
        b) accept mods that “lock-in” their loss,

        why would they chose (b) over (a)? Furthermore, CAN they chose (a) over (b)? or would doing so violate their fiduciary duty?

        1. Yves Smith Post author

          B is better than the status quo for the overwhelming majority (measured in invested amount) of investors in these deals.

          Your A is like putting a gun to their heads and blowing their brains out. All they have is certificates that represent certain claims on cash flows that go into the trust. They do not have any direct rights to the loans.

          If they argue the trust does not exist, they are saying they have nothing. That is going to make them very unpopular with their clients and tank the MBS market. If they succeed, it wins them nothing and damages them directly. They still have to figure out causes of action to go after the people who created and perpetuated this mess.

          1. Jackrabbit

            Yves wrote:
            They do not have any direct rights to the loans,

            Sorry Yves, I must be missing something here. The rights to the loans wouldn’t matter if the sale of MBS could be reversed because the Trust was not properly constituted (due to the failure to convey the Note and other reps and warrantys). Why wouldn’t the investors insist that the sale of securities based on the Trust is void and demand a full refund?

            If the Trust is “an empty box” then the banks either return the money or face charges of fraud.

            PS When you have talked about the difficulties of getting buy-backs, I thought it was because it would be much more straight-forward for investors to just make the case that the Trust was not constituted (so the sales are void).

    2. dejavuagain

      Jackrabbit says:
      Who takes the losses on a write-down? The banks or the investors? Why would investors agree? They were not at fault …”

      I would not accept the proposition that the investors were not at fault – either the investors were sophisticated investors or relied upon advisors who were sophisticated investors. Anyone with half an economic brain could see the income-rent-house price discrepancies starting in 2004 or so.

      The investors were certainly more aware than the typical sub-prime option borrower. The investors were simply chasing higher yields and ignored the many many danger signs. The investors as a group allowed Pooling and Servicing Agreements and offerings that relied more on representations of fact rather than fact. The investors were dumb enough to rely upon the rating agencies despite the obvious conflicts.

      Yes, the investors may have claims back agains the sponsors, and if so, should pursue them, and they should be able to assert claims against the rating agencies, although that is tougher because of their free press immunity. Pension funds should sue their advisors and should replace the board members who allowed these purchases.

      But, there is no reason to protect the investors as against the others involved in this mess.

      1. Jackrabbit

        By “not at fault” I was referring to the problem with the Trusts.

        If the investor choice is:
        a) make the case that the Trust is void due to non-conveyance of the Notes, OR
        b) accept mods that “lock-in” their loss,

        why would they chose (b) over (a)?

  29. JamesM

    I think people arguing who should pay are missing the point. The money has evaporated, been taken, been wasted, gone over seas. You can’t easily get it back. What money? The money to fund the bad mortgages. All that is left behind are lots of rather worthless asset backed securities.

    This argument that the people who did pay their mortgages will have to bail out deadbeats is only true if the goverment bails out the banks obligations.

    A much simpler solution is to simply tell the investors, good luck chump, you invested (gambled) pot of steaming turds sold to you as AAA rated paper by some Wall Street crooks.

    That’s the risk in investments, sometimes you make a lot of money and get to keep it, sometimes you lose money and get to eat it.

    Not only is your investment not worth much at all, but the trustee on the investment trust has probably been committing fraud in the name of the investors.

    Fraud opens up any remaining value in the trusts to attack by the defrauded, and from courts as punishment, and quite possibly the trust and investors IRS status revocation leading to claw backs from disbursements made so far.

    The fundamental problem is that large banks decided to play trustee on the secularized pools, and worse to enter contracts to pay investors if there were problems. We can look back and say that was incredibly unwise, stupid and ruinous. We can look back and say there should have been regulation, over-site or outright laws against such bank involvement. Problem is they made their bed and now have to lie in it.

    The taxpayer should not be bailing anybody out. We have no obligation to make sure the investment (gambling) notes pay off.

    Investors in a bubble get hurt bad.
    – Lots of the home owners get hurt in that they may have paid too much, and have been sold a loan they could never afford.
    – Investors in the notes lose much value, maybe all.

    Such are the risks of gambling in a bubble, betting on the up side or continuing appreciation.

    This bubble is a little unique because the middle men were lying to everyone.

    The middle men were lying to the home owners in many ways:

    – Lying to the prospective home owners, about the value of the home, their ability to handle the debt they were being sold and the promise that after a couple of years in the ARM, after the home owners had established payment records, they could re-finance into fixed rate notes.

    – Lying to the investors in the funny money notes by claiming they were good investments of AAA rating.

    – Lying to the States and public about who was the current holder of the note by setting up a private system for tracking the note swaps. Deliberately failing to record such changes in the public records as required by law.

    – At the same time the middle men were taking out bets that the whole thing would go bad. Bets that paid out when the scam they had jointly set up came tumbling down.

    – Then in attempts to bail themselves out, a large number of the middle men turn round and lied to the courts. Forged documents, committed perjury and effectively destroyed any remaining value the notes, for whom they were the trustees, might have had.

    The economic bottom line that is quite inescapable is simple: The billions of dollars invested in mortgage backed securities were unwise gambles in a bubble market. The people who made the gamble have to take the hit, all of it. Along with any liability caused by the actions of their agents, the trustees, depositors and their various agents.

    The companies that acted as middle men should go broke. Some of the people with direct or fiduciary responsibility should go to jail. That does not help the note holders, who’s gamble in the market is now close to worthless.

    Any attempt by the government to prop up the banks so they can continue to make payments to the note holders is not a bailout for the home owners, it is a bailout for the gamblers. That is fundamentally wrong.

    It is true that some delinquent home owners may get a break on the underwater obligation they were sold on the over price house they were induced to buy. It should be said that most don’t. More than 90% of foreclosures are completly uncontested, the bank gets exactly what they want. Of the contested ones most still go to the bank who forecloses leaving the home owner with nothing except a personal deficiency judgement for the balance. So very few are home owners are getting any break at all.
    Even when the home owner gets a work out deal, like a HAMP modification, it normally doesn’t reduce the principle on the amount owed. What modification there is only lasts a few years before reverting to the orignal terms and payments. Most realistic looks at the modifications suggest they are only a way to forestall the banks losses by putting the eventual foreclose off until the market has recovered a bit an the bank will get more for the property, while at the same time getting the owner to pay payments in exchange for the belief that there is a way out.

    Folks, in 99.99% of the cases home owners are not getting a free house. Even when the note has become bifurcated, separated from the mortgage which may prevent foreclosure, the debit obligation on the note does not go away.

    The taxpayer should not take the hit for propping up the middlemen, especially if their conduct is questionable or criminal.
    Nor should the taxpayer be responsible for making the gamblers bad bets into sure things. (If your bet turns out to have been fraudulently AAA rated go see the people who sold it to you).

    The only party the goverment has a serious duty to protect is the American people: By making sure that laws and due process are upheld and making sure that fraudulent or criminal conduct does not lead to financial gain.

    Adding money to bail out the investors is wrong. Funding mechanisms that get realistic settlements based on cram-down, a technique used in chimerical lending transactions every day, is not just sensible but equitable, for it would allow home owners to get the same sort of loan relief that is available to corporations.

  30. F. Beard

    I’m tired of being told that I should subsidize someone else’s bad decisions. DB Smith

    Like the fractional reserve bankers who lend money they don’t even have and hope to get away with it?

    I have enough problems taking care of my own mistakes, thanks very much. DB Smith

    No wonder! People who try to save are gouged with negative real interest rates. People who try to invest are plagued with a volatile stock market. People who try to keep their jobs are plagued with the threat of unemployment.

    When a large part of the population has made “mistakes”, is it their fault or has systemic failure occurred?

  31. charles

    ‘Se lever du pied gauche’ as the French like to put it, I
    can see no other reaason for erasing my unobstrusive reply. I know
    of you comments about the problem of you not being
    credited where it should have happpened, i.e Magnetar,
    but unless you feel misepresented ( you can also have the NYT times to refer to you as financial detective,or talk the matte over with Ellen Brown or Hazel Andeson ) I cannot but stress the importance of these two posts, for the ‘vulgum pecus’, the CRIMINOGENIC issue at work, hughlighed by what I had referred to as your country’s best two financial detectives, namely William Black and George Washington: ( they both hold other jobs, so let’s call them ‘marshals’ for the sake of it ):
    “Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership”
    http://www.huffingtonpost.com/william-k-black/foreclose-on-the-foreclos_b_772434.html
    “Foreclose on the Foreclosure Fraudsters, Part 2: Spurious Arguments Against Holding the Fraudsters Accountable”
    http://www.huffingtonpost.com/william-k-black/post_1115_b_772820.html

    1. Richard Smith

      It wasn’t erased. I’ve just released your original, must’ve fallen foul of some filter or other.

      1. charles

        Dear Richard, sorry for the misunderstanding, due to wahatver.
        Feel free to delete my redundant second reply. Lo siento, being a daily reader of your blog and a proud owner of ECONNED, now available in the Amsterdam bookshops, on the side of good news…

  32. Siggy

    General loan modifications are a mistake of profound implications. If the borrower has defaulted, the note holder has the right to and should foreclose, provided that the apparent note owner can demonstrate a true sale and rightful possession. The responsibility for demonstrating a true sale lies entirely on the party that asserts standing.

    In foreclosure there will be a loss against the outstanding balance of loan. Loan modifications tend to mitigate that potential loss. What is critical is the current house price relative to the unpaid balance. Just how far under water is the loan balance. Also very important is why the borrower has defaulted and what is the capacity of the borrower to service mortgage debt.

    I suspect that in most cases it will develop that the borrower is incapable of serving debt even if they receive a 40% reduction of the unpaid balance.

    Stepping back a bit, I think it is extremely important to recognize that the lender did not have to make the loan. Also, the borrower was negligent in seeking a loan and terms greater than he could service. That leads me to the idea that we should penalize the lender, or the subsequent note holder, first and the borrower second. This sequence will result if we follow established foreclosure law.

    Now if the note holder cannot demonstrate standing, nothing happens until he can. When he can, foreclosure goes foward, write off the loan loss and evict the defaulting borrower. Leads to a social problem? Yes, the recognition that there is something seriously wrong with the financial structure of our society.

    That problem is about excess credit money that needs to be extinguished and that means a very deep depression. We can do all manner of things but ultimately we will have to recognize that our problem is a fiat currency being used in conjunction with fractional reserve banking. QE will not solve the problem, it will merely delay an ultimate resolution that by reason of delay itself will be made very much greater than the one we have now.

    Rare is the finance industry professional who will admit that most of the TBTF banks are insolvent. Most will not speak to the problem of the carrying value of loan assets that originated by way of subprime or other profligate lending. Increasingly it is becoming clear that the best orderly resolve would be for the nationalization of the TBTF institutions. The Swedish model is interesting but may require modifications that acknowledge that the size of our problem is several magnitudes greater than was the Swedish case.

    Yves piece is good work on a complex and contentious problem. Banksters will protest with ferocity, diletants will dither about spurious facets of the problem. Poltician will pander to those that control campaign contributions and ther general public will endure the duress that we have. All of which is noise unless and until we have serious prosecutions of the fraud that has been and continues to be perpetrated. Theoretically, I can posit all day that the core problem is a fiat currency and fractional reserve banking.

    I wish that the problem were limited to that, it’s the damm fraud that joins with the fiat currency etc that is so egregious.

    1. F. Beard

      Theoretically, I can posit all day that the core problem is a fiat currency and fractional reserve banking. Siggy

      Actually, fiat is ideal for a government money supply since government is force (taxation). Attempts to have government money be backed by gold or silver or anything else are not only unnecessary but suspect since they would grant government privilege to a particular private money or class of private monies.

      Private monies, OTOH, in order to be freely accepted, MUST be backed by something of value.

      The problems we have result from the fact that we attempt to use a single money supply for both the government and private sectors. That is a moral impossibility, I would bet.

  33. Stan

    In a lot of ways we don’t see the forest for the trees. TBTF banks have taken over the real estate lending industry, approximately 20 banks hold 95% of the mortgages in the country. All of the major banks have a subsidiary that handles the ordering of appraisals, credit reports, title insurance, etc. These subsidiaries are large profit centers. Before Countrywide became part of B Of A, Landsafe was the source of 12% of their profits.
    These service providers are supposed to be available to other lenders, but in reality they have one customer, the bank that owns them. The fees paid by borrowers go to the service company and are apportioned to the low bidder and in some cases just go directly into their pocket and provide no service. The appraisal profession is comprised of people who are forced to work for these providers as are title companies. If banks are allowed to indemify title insurance companies from any legal problems arising from a foreclosure how long is it before they just indemify themselves against everything and do away with title insurance companies. Likewise appraisers are not guided in giving values they are just removed from the fee panel.
    TBTF just about has control of the entire real estate food chain, what will a borrower be looking at in the near future?

  34. Tom Hickey

    The major reason that the crisis is tenaciously hanging on is misdiagnosis. The powers that be apparently think that this is a typical business cycle instead of the culmination of a long financial cycle, which, MInsky observes, ends in Ponzi finance. This round of Ponzi finance was actively managed by the financial oligarchy using “control fraud,” as documented by Yves, Bill Black and others.

    “It’s the corruption, stupid.” Unless corruption is addressed, this continuing crisis is likely to end badly, possibly in debt-deflation and a global depression, bring several governments down, and possibly putting an end to financial capitalism. If this present crisis doesn’t do it, a following one will, since this path is not sustainable.

    What has happened over the past thirty years is that productivity (supply) increased and the real wage (demand) decreased in developed countries. While this increases corporate profits, it leaves an output gap that can only be closed with increasing debt, government injection, or net exports. Either the private sector has to go into debt to cover the gap, or else government must run a corresponding deficit, to the degree that net exports fall short.

    Ever-increasing debt is not sustainable forever. Unless the real wage/productivity gap closes, developed countries will suffer from lagging demand or unsustainable debt, if they cannot rid themselves of their goods surplus through exports.

    Switching from net importing to net exporting would involve protectionism and massively depreciating developed (CAD) countries’ currency relative to emerging (CAS) countries’ currency. So plan on trade and currency wars, e.g., as the US takes on China.

    Add to this the corruption, and you have a recipe for disaster due to overreach on the part of the privileged class.

    1. F. Beard

      “It’s the corruption, stupid.” Unless corruption is addressed, this continuing crisis is likely to end badly, Tom Hickey

      The whole monetary system is corrupt since it is based on theft of purchasing power via credit creation in the government enforced monopoly money supply.

      … possibly in debt-deflation and a global depression, bring several governments down, Tom Hickey

      Which is why a general bailout of the population is called for,imo.

      and possibly putting an end to financial capitalism.
      Tom Hickey

      Yes. We will either move to socialism (after perhaps a temporary jaunt into goldbuggery) or genuine capitalism. If we are to outcompete the younger and more enthusiastic fascists in China and India, we had best adopt genuine capitalism.

  35. Tom Hickey

    1. Yves: But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.

    The actual analogy is supposed someone wrote 500 checks on a closed account and claimed it was a mistake and just a technicality?

    2. Yves: That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

    Shouldn’t “dubious” be “fraudulent”?

    1. Yves Smith Post author

      NYT wouldn’t let me use the “f” word. “Fraud” says there was intent (how you can believe there wasn’t intent is beyond me….) and carries liability.

  36. JS

    Yves,

    Read your piece in the NY Times this morning.

    WOW! Great work!

    Thanks for helping people understand what has really happened. Too many think this is just about a bunch of deadbeat homeowners who want a free ride.

    Three points I’d like to add:

    1. While depicting an accurate account of the behavior that caused this crisis, you fell short of using the “F” word, FRAUD. All the people who knowingly created this problem committed FRAUD. They should be prosecuted, and go to jail

    2. Many homeowner don’t need a principal reduction to keep their homes, just a new mortgage at current rates.

    3. Longer term, we must segregate Washington from Wall Street. This mess didn’t come as a surprise to Washington. It was simply ignored by the Washington arm of Wall Street (Greenspan, Bernanke, Geithner, Paulson, Summers. etc)

  37. PunchnRun

    Yves, Allow me to add my voice to those expressing thanks for this and the immediately preceding article “Protest Works.” The NYT may be losing credibility in some circles, but it still has a powerful presence. Your appearance there demonstrates that some are listening. That ties into the “Protest Works” article.

    I was in high school while those Viet Nam war era protests were going on. It was a mess, and in retrospect the arrogance of the anti-war crowd did not help. I was one of them too, but of course was not in position to march on Washington. Just held signs in the local town square. It took many years. In 1965 the anti-war crowd was minuscule and widely ridiculed if not despised. Even when they thought they had won, after Johnson declined to run for a second term, there was disappointment as Nixon doubled down with an enormous escalation. But by then being in the anti-war movement was not just about altering national policy, it informed all of our political and moral thought. There was never, so far as I know, a chance that they would have given up. Too bad they didn’t make the further connections between the military-industrial complex and the growing dominance of corporations in politics. We (I) thought it was over an 1973. We won the battle and could go home. Foolish me, forty years later the meaning of Jefferson’s statement that “Eternal vigilance is the price of liberty” was less about the second amendment that it was about the first.

  38. bokun59

    A contract is a contract. No one forced the banks to slice and dice the ownership of notes. If someone chooses or is forced to stop paying, s/he risks being foreclosed- but only by the rightful note holder.

    For the record, any person who pays his/her mortgage today without finding out who owns the note is a moron. As an example, I am trying to sell my property and the sale is being halted until we can find out who owns the note. No one seems to know; so what entity shall I pay when the funds from the sale are transferred? Not the servicer- they cannot tell me who owns the note. All it knows is that it is a ‘private investor’; which by due diligence I find out is a bank that invests other people’s monies in mortgage securities- and wait, it gets better- and this bank was/is owned by Lehman Brothers.

    Yes, the bankrupt Lehman Brothers; so now I have to find out how the bankruptcy trustee handled my loan as this bank may have been held out of the bankruptcy (of course, I was never notified).

    And of course, my original note holder never advised me that my loan was transferred and/or sold. Nor did I receive a release from then as I assume it was paid in full by the subsequent note holder; who would then normally have a claim against me.

    At this point, I am still waiting for the note to be produced and all paperwork concerning any transaction(s) with the note to be produced. The title company for the buyer will not issue a policy until all this is resolved. With good prudence, I might add.

    If you have a mortgage, find the note.

    1. Jane Doe

      Repeat what I said above: Posts like yours indicate you either cannot or do not want to understand contract law. Saying a contract is a contract is extremely ignorant of how lawyers determine what is proof that a contract is a) valid and b) enforceable. What you propose has meaning far beyond shilling for the banks.

    2. Poor and Unemployed

      So you are another deadbeat who wants to live in a house without paying mortgage, taxes or rent? Why not ask your creditcard company to provide you with original signed receipts and confirmation that they actually paid the vendor before paying your creditcard bill!

      Sorry! I forgot that you are a deadbeat so you are not paying your credit card bill either

  39. michael

    Great article Yves!!

    unfortunately your imagination that congress and appeal courts will not go along with money saving, short cut changes in laws to save the banks is misplaced. banks won’t have to ‘tacitly admit’ anything to have congress come to their rescue. nor will the current court judges (jesters) not do the FIRE system bidding ‘simply’ because there is hundreds of years of prescident.
    Regulations will be fabricated far from the light of day, loop holes the size of tbtf banks will be created, even national security will be used to justify to do all that is necessary to preserve the status guo (they might even quote the FED chairman(s)…’we will do all that is necessary…”
    and FRAUD indeed. and people even as smart and caring as our fine bloggster will avoid this word and its application for fear of causing even further damage to the FIRE system. imagine the use of common law to treat the crimminals as crimminals in these cases….now that would really slow the process as all levels of mortgage management from top to secretary would be taking the fifth and nothing could get forclosed.(god forbid we put LAW above the needs of the banks…even in the name of expediance, economic safety and ultimately ‘national security’

  40. Joe

    I hope that article was not considered ‘new news’ by the readers. Seems on par with much of what you’ve written in the past.

    I’d suggest a cartoon graphic for the youngins. Perhaps a gleaming bank surrounded by a devastated city.

    It’s a visual age.

  41. Small Business Guy

    OK, but how do we address the entire issue over clouded titles, and ownership rights?

    “…giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.”

    Solving this one is not going to be a small problem. First off, assuming one can actually trust information provided by MERS is becoming problematic, at best. But being able to convince all the other players out there (the Courts, homeowners, the legal community, realtors, etc.) that MERS is credible is going to take multiple acts of God, to say the least.

    So, make the assumption MERS is off the table as being a viable solution.

    The Feds can’t do it – at least not on any realistic timeframe – and it’s likely going to take years and years to fix. Hell, they can’t successfully create a modern ATC (Air Traffic Control) System, and this task puts that one to shame. And bluntly, the trust issue comes back into play. Can’t trust them.

    So honestly, it’s back on the locals. Yep, we’re going to have to rely on all those “Backwards local yokels who love their guns” to solve this disaster, and clean up this mess.

    Except that all us dummies located out here got us some ideas that might just work:

    Step 1: With real estate, the three most important elements of value are “Location, Location, and Location”. Apply that same old real estate rule to this entire situation. MERS tied everything to a Mortgage through a unique assigned (MERS assigned) identified (usually a numeric code).

    Well, virtually all of the US has cadastral mapping systems (http://en.wikipedia.org/wiki/Cadastre), and some type of Permanent Parcel Identifier numbering system, unique to each jurisdiction. And that number represents a specific legal description within that jurisdiction. These are also known as GIS (Geographic Information Systems). Now, currently, they’re mostly all Windows based system, and are really pretty closed in systems (highly secured, limited access).

    But it’s a starting point, and you can tie GPS points to the location on the ground.

    Conclusion: There’s our starting point – this gives property owners, lenders, bond holders, EVERYBODY a stable point of reference to property.

    Step 2: Transparency. If we don’t do this, everything else we do is a waste. We have to convince people we are playing it straight. So, to put it bluntly, we have got to be willing to put it all out there in front of God and everybody, all the time, warts and all.

    It can’t be MERS – far beyond too compromised. Title companies can contribute, but can’t run it. Got to be done by the locals, and has got to be absolutely independent of any taint from the people who got us into this mess in the first place.

    The focus here is as follows:

    01 We are not about collecting money (past recording fees). Don’t care about that. Not part of the issue. In fact, whatever paper we get from banks, etc. which are provided with the goal of cleaning up this mess would not be subject to additional recording fees, even if they were not originally recorded (and should have been).

    Our goal is to fix the mess, not to collect additional recording fees. Focus on what is important!

    02 Current recording / document processing software systems are not going to cut it. Primary reasons for this is that (a) They’re most about tracking fees and money, which we don’t care about, and (b) They’re mostly all Windows based, closed-in systems, and that makes transparency difficult, to say the least.

    We need cloud based (or browser based) technology put in place for tracking property. We need it open for people to see and watch over, and we need the ability to view images of documents, with the security of digital watermarks being displayed across all documents to remove risks of fraud /forgeries.

    We have to remember, above and beyond everything, is that we as a nation cannot afford to have a real estate freeze occurring like the credit freeze back in 2008-2009. That’s the goal – eliminate that possibility.

    Step 3: Tie every single recorded documents (or even not recorded documents) to each parcels physical location on the ground, primary through their existing GIS Systems, or even Google Maps (if that’s all you got, that’s what you use).

    Consequences: It means we read legal descriptions like mad, scan everything and attach it to records, run giant server farms, and have a nationwide broadband rollout. But there are real opportunities here also.

    Is it a perfect solution? – NO. It’s a real ball buster of a solution, because the workload to do this is just going to be almost unimaginable. It’s going to take years – and years.

    Step 4: If there’s no record of a mortgage assignment in the database, well the supposed mortgage holder is SOL. You want rights, provide us with valid paperwork, even if not originally recorded. Faked up documents not accepted.

    If you can’t prove your case, the indebtedness becomes unsecured. “Too Bad, So Sad, Sucks To Be You” – know the people you are doing business with.

    Conclusion:

    Our problem is Uncertainty – If it becomes widespread in the real estate market, we’re all in real trouble. And I tend to work off of two rules:

    “Hope is Not a Plan”
    When all you got is a whole lot of Nothing, Something is better than Nothing”.

    So there’s my plan as to how the locals out here on Main Street can fix this entire mess. Wall Street and the Feds are going to have to bear the cost, and it’s going to be expensive, but it can be done.

    But there’s one good thing about it. Once you start the process – you are telling everybody that “We’ve got a plan to first stabilize, and then fix this mess. Going to take a long time, but the process is started”.

    And right now, all we’ve got is nothing.

    My .02

    1. gerold k.b. weber

      I agree, the facts should be established and be there for everyone (with access rights) to see, to reduce uncertainty for all stakeholders. And this will not be cheap.

      Did you see Peter White’s ‘Foreclosuregate Explained: Big Banks on the Brink’ at Truthout?

      White on MERS: “But since MERS is essentially Excel spreadsheets shared between bankers and brokers, it is really just a bunch of numbers. MERS was designed to make money out of the mortgage market, not parse exactly who owes what to whom.” Could that be really true?

      Then they will need some time to fix that mess, if possible at all.

  42. Shawn Newman

    Thanks for the Op Ed. This is a perfect financial storm. Contrary to popular belief, the mortgage mess is not the case of a “few bad apples”. As you point out and as noted by the CNBC video discussion here [http://stopforeclosurefraud.com/2010/10/13/videos-you-must-watch-it-all-began-w-marcy-kaptur/] it is systemic. It would be very difficult to undo the damage by re-doing the paperwork. It was an industry wide scheme to avoid the requirements of state real property law (statute of frauds) and negotiable instruments (Uniform Commercial Code). See “How Negotiability Has Fouled Up The Secondary Mortgage Market, And What To Do About It” by Dale A. Whitman, 37 Pepp. L. Rev. 737 (2010).

    As noted here [http://defendtoledo.org/ ] some people are organizing and telling the banks to get lost. While this type of civil disobedience may have been a sign of desperation, given what we know now, some national organizations are recommending people write their servicer demanding proof of ownership and then sit tight. See: http://action.seiu.org/page/speakout/wheresthenote?js=true If they cannot prove ownership they could live rent free until someone begins foreclosure. The challenge in non judicial foreclosure states is that a homeowner would need to sue whomever is attempting foreclosure since once the sale occurs it is very difficult to unwind. The owner has a plethora of claims against not only the banks but title companies and insurers. Among the most powerful claims are violations of state and federal consumer protection laws such as the Fair Debt Collection Practices Act which penalizes those who would try to collect a debt they don’t own. This all depends on the paperwork (of course) but the multitude of claims are set out by Professor Christopher Peterson, Univ. of Utah. See: http://stopforeclosurefraud.com/2010/10/13/two-faces-demystifying-the-mortgage-electronic-registration-systems-land-title-theory-by-christopher-l-peterson/

  43. Russ Abbott

    Great column! What I don’t get, though, is with whom the principle modification would be negotiated. If no one can prove ownership of the mortgage, who has the right to modify it?

    1. Jackrabbit

      Russ Abbott said:
      What I don’t get, though, is with whom the principle modification would be negotiated. If no one can prove ownership of the mortgage, who has the right to modify it?

      Good point. Then there’s the other side of the coin: the investors. Why wouldn’t investors just make the case that the Trust is void and they want their money back?

  44. Al

    “Fee-hungry bankers broke the origination end of the machine…” while fee-repulsive realtor opposed them while trying to float the economy back over water!

    Real estate transactions start with a “strait-jacket” proforma contract controlled by the National Realtor Association. Yet I’m still waiting for an analyst to talk about how “price escalation clauses” were the main tool used by realtors to inflate transaction prizes at so many anxious kitchen tables between 2003 to 2006. Or how, while a loan origination netted @2%, of contract prize, paid by borrowers, realtors netted 6% from seller -therefore making realtors more “fee-hungry” than bankers. On a world where travel agencies were widely replaced by online ticket sales, I still puzzle with how do realtors succeed to protect their listings information to sustain their fees.

    Finally, re-check your facts: when many owners found themselves struggling with the perfect storm of arm-adjusted increased mortgage payments, to their negative equity or “underwater” home, it was again a realtor who pushed the solution over an anxiety-filled kitchen table: the “certainty” a “SHORT_SALE” to walk-out of the home, over the uncertainty of holding tight to their (negative) asset.

    Of course, again, the realtor would take care of listing their house in such a down-going market, for a fee that this time would be payed by the troubled bank holding the mortgage note. This, sir, pushed prices further down, foreclosures further up, and the economy deeper under water…regardless of if you notice it or not.

  45. michael

    Yves, so as not to guess…WHY did you leave the FRAUD word out of your peice? Do you think there has been no fraud? or too incinderiary a word to name something that accurately?

    and, even as we speak the taxpayer hook grows as the FED and other gov’t owned agencies continue to buy up all this crap….why they even own a part of MERC of course which will further cost us to defend (ironically) our collective selves against the actions of some other aspect of ‘ourselves’.
    pretty soon there will be no one but the taxpayer (in the FED’s case weaker dollar, inflation and higher taxes) to cover all this crap buying spree.
    it will be one agency of ourselves hiring lawyers to sue another agency of ourselves hiring lawyers to defend.
    all in the cntinue name of keeping the system from collapsing, liquidity available, stocks higher and treasures safer.
    the joke is on us for sure. what am i missing in this illusionary circle jerk

    1. F. Beard

      and, even as we speak the taxpayer hook grows as the michael

      I am sick of the “it will fall on the taxpayer” theme. The truth is that the entire population could be bailed out with no new taxes, no new debt and minimal inflation risk. How?

      1) abolish fractional reserve lending; set reserve requirement to 100%. This by itself would be hugely deflationary but press on …

      2) Calculate the amount of banker created credit-debt. I suppose this is approximately equal to M1.

      3) Have the US Treasury send every American adult a huge and equal check of new, debt and interest free United States Notes sufficient in total to pay off all banker created debt TIMES from 2-7 since that is the Biblical penalty for theft.

      Winners:
      1) Debtors
      2) Savers
      3) Banks in nominal terms
      4) State tax revenues
      5) the economy in general

      Losers:
      1) fractional reserve lending
      2) the uber rich in relative terms

      1. michael

        agreed, but won’t happen.

        alternatively, stop the FED and all gov’t agencies fully controlled or otherwise from purchasing any MBS and related debt or derivities of same. make the players themselves (banks, servers et al) absorb the losses with no federal guarantees (no future taxpayers).
        IF the losses are as Yves suggests…50% range for all of them combined..this will have the desired deflationary affect..which is of course the exact opposite affect the FED and federal gov’t have in mind.

        1. F. Beard

          .this will have the desired deflationary affect.. michael

          Contrary to the Austrians, who are trapped by ideology, deflation is NOT good. The Keynesians, who know deflation is bad, attempt to cure it with borrowed “stimulus” which only puts off the problem, at best.

          The solution, as Moses informs us, is debt forgiveness. However, since savers were also cheated by the counterfeiting cartel, a general bailout would be more just.

    2. Yves Smith Post author

      As I have now said several times above in the thread (but after you commented) the “f” word, fraud, was edited out by the Times.

  46. ANB

    Realtors job is to help people find homes to live in and to sell homes for people that for one reason or another need to move. The market prices were fueled up by easy money (created by the banks and fueled by Wall Streets ultimate purchase of that paper). As a realtor i hated that market. It made everything more difficult. See the 100 year case shiller graph and you will see that the meteoric rise in prices is the real problem here… Even if I bought in the 2003-2007 bubble with a normal mortgage, putting 20% down, qualifying all the way, I am now under water. Offers to refinance are stupid… the house doesn’t qualify any more. The only way to solve this is to drop ALL PRINCIPAL BALANCES down to todays fair market value. After all that is what the lender gets in a short sale, that is more than what they will get in a foreclousure. Adjust the interest rate to 2% or 3% and let the original borrower stay in the house for say 5-10 years. It would stabilize the housing market and people could resume normal moving, living etc. It is interesting to ask the question who actually is the beneficiary of the note that would have to agree to the reduction in the principal balance. The reality is that whoever it is that owns the nore… someone has it as an asset in the column of their financial statement and it is not an asset… With 40% of the homes in the US underwater, this is the ONLY way to stabilize this crazy situation.

    I owned a home that i paid 435K for in 2006, (I invested 20% down). In late 2008, i wrote a letter to the servicer saying the most recent sale in the complex was 245K If you reduce the principal bal down to 245K and adjust the interest rate i would continue to make payments. Their response is “we don’t do prinicipal reductions” …. So then i did a strategic default… in Sept 09 i brought them a short sale offer at 200K.. they then wanted me to contribute 10K to close. I said no so then they foreclosed. Six months later they put the condo on the market for 160K. There was a problem with the HOA so only a cash offer would work… then they dropped the list price to 144,900… the investor is a Lehman trust. (i thought they were bankrupt). I have documents that say that the bene was MERS???

    This foreclosuregate situation is huge… thanks for getting it into the nytimes so that hopefully more people will be talking about it.

    1. Poor and Unemployed

      ANB

      Would you do that with IRS or Casino or margin account? Or being deadbeat is a smart thing to do? Who do you think will pay for your gamble?

      People like you are a disgrace!

  47. jabre

    Yves,

    ‘The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages’

    When you’re referencing a 67 page document it would be helpful if you included page and perhaps paragraph so that we can clearly understand your basis. I’m reading on page 4 of cr10248.pdf:
    ‘ 3. This chapter shows that the crisis has created extreme disparities across states in terms of skill mismatches and housing market performance, which could have raised the national equilibrium unemployment rate by 1 to 1¾ percentage points.’

    Is this the correct reference? Is this the basis for the use of the terms ‘serious’ and ‘largely the result’?

  48. Eureka Springs

    Laughing… I see Yves managed to avoid the ‘f’ word in a wonderful Op-Ed (thank you very much). However I am happy to see the word used 48 times (so far) in your comment section.

  49. Patrick Dennis

    If a bank or mortgage servicing company cannot prove that it has standing to foreclose, how can it alter any of the terms of the mortgage?

  50. Nelcisco

    Guy D. Cecala, chief executive of Inside Mortgage Finance, which publishes newsletters and research for the industry, said that most mortgage executives believed the problems “are largely procedural and can be corrected fairly quickly.” -Sewell Chan, NY Times.

    Mortgage execs. are coming to terms with that now? And whats this fairly quickly shit? Its not going to correct fairly quickly. This is gonna be long but more spin from the industry.

    ANB sounds like a seasoned realtor because he/she speaks with true concern, you should hear the realtors I talk to in the marketplace, the young hot realtor will tell me RE bottomed because history suggests that by this time things normally turn for the better,especially since value and interest rates have droped at the same time means happy days are here again,You know, buying into that Lawrence Yun NARS media spin, or the young punk loan officer who thinks that if he smiles and dials more numbers and gets more belligerent he’ll close more deals. Nothing more is futher from the truth. The reality is until the forces (banks,Wall St., Government, etc.) put aside their selfserving agendas and stop kicking the can down the road things will begin to turn. Oh yes we’ll go through the pain, but better now than later, I mean….who would have thought in 2007 when all this was just a subprime issue that it turn would into a potential economic collapse now as we are approaching 2011?

    1. Chris LaHaie

      When the collateral is worth 50% of the value of the mortgage, the debt will not be close to being paid in a foreclosure. Also in most defaults the banks costs skyrocket the minute they take over a property only adding to the “debt” on the collateral.
      Foreclosure makes little business sense if there are any other options. For some reason the public seems to think 30 yr mortgages should be writing in stone and foreclosure to be used in some punitive way to punish people who have fallen on hardship. Therefore the entire town or city or neighborhood should have suck it up in order to punish someone for defaulting. Every one then would have to reset the value of their house because of the eventual REO sale.
      Foreclosures are damaging to everyone not just the person in default.

  51. MuckAbout

    Put it all in a pot, add water, seasonings and when it’s all cooked down two things remain. Debt and fraud.

    Debt cannot be boiled away and remains to be paid either by default (which it should via existing bankruptcy laws – banks going under or not) or by default of the Federal Reserve kind: printing money and buying Treasury debt in vaster and vaster amounts until the debt is paid with worthless dollars.

    The second option is far worse, as history has taught us over and over and over. Far before the second option is complete, we will all be in the soup.

    But, one way or the other, the debt will be paid regardless of the intermediate running in circles, screaming and shouting, finger pointing and economic legerdemain at all levels.

    Default by audit and bankruptcy and put each and ever officer of each and every bank, mortgage company, or servicer who committed or was responsible for fraud, theft and assorted crimes against us all on trial and lock his/her ass up in jail if found guilty.

    But the debt will still have to be paid.

    1. Yves Smith Post author

      No, bad debts are typically written down and/or renegotiated. A foreclosure in this environment result in a substantial loss, the debt most certainly is not satisfied in full.

    2. F. Beard

      or by default of the Federal Reserve kind: printing money and buying Treasury debt in vaster and vaster amounts until the debt is paid with worthless dollars. MuckAbout

      You present a false choice. The US Treasury could bailout the entire US population without significant inflation risk as I’ve mentioned before.

      It’s too bad for the FR bankers that their usual divide and conqueror strategy (savers vs borrowers) is shown to be a bluff.

    3. Chris LaHaie

      When the collateral is worth 50% of the value of the mortgage, the debt will not be close to being paid in a foreclosure. Also in most defaults the banks costs skyrocket the minute they take over a property only adding to the “debt” on the collateral.
      Foreclosure makes little business sense if there are any other options. For some reason the public seems to think 30 yr mortgages should be writting in stone and foreclosure to be used in some punitive way to punish people who have fallen on hardship. Therefore the entire town or city or neighborhood should have suck it up in order to punish someone for defaulting. Every one then would have to reset the value of their house because of the eventual REO sale Floclsures are damaging to everyone not just the person in default.

  52. razzz

    This is a States’ Attorney General problem. Law is well founded, banks have no recourse without proper documentation.

    You can’t offer a fix if you have no standing not even a pretend fix.

    Let investors sue where ever MBS originated and let the chip fall where they may. Courts are very capable when it comes to handling fraud.

    Unfortunately, banks are heavily favored in Congress and while Congress doesn’t need to do one damn thing concerning foreclosure they might have a tendency to protect the banks with new laws, again. They already allowed investment houses to become banks to qualify for bailout protection, that’s enough.

  53. Chris LaHaie

    Yves,
    Thank you for the great op ed today and
    for pushing back against the commments of those who still don’t understand the essence of this crisis but still feel it is their duty to say ignorant things.

  54. MichaelC

    Well done. It’s exactly the cogent (and restrained) summary of the state of the situtation NYT readers need to read and can appreciate.

    You’ve condensed the voluminously detailed blog posts backing up each paragraph magnificently.

    I like to hope that when one’s on solid ground with the case,and can present it rationally, while exposing it to open source vetting, there’s a path out of this mess. Kind of “anti-big lie”. Keep telling the truth and eventually it may become accepted as truth.

    Maybe the NYT doesn’t feel like their readers are quite ready for the F word just yet, but letting you go as far as you did in their space indicates to me their world is being shaken. About time.

    Brava and Thanks.

  55. Mannwich

    Mucho congrats, Yves! I was delighted to see your column this morning when I opened the paper. Keep up the great work.

  56. Poor and Unemployed

    Yves

    Congratulations!

    Here are my questions to you and I hope you will answer them.

    Can we apply the same thinking to all types of debt and blame someone else or this is a privilege for the deadbeat owners only? Would you support to keep the renters in the homes if they were 12 months behind on the rent? And what about the buyers? Where do they get counted in your views? Do they get equal opportunity to default in future and stay in homes without housing expense (No Mortgage, no rent, no taxes)?
    For every sob story about the evil banks, I can show you 10 real families who are abusing the system and 10 people in this administration who are facilitating them.
    Come down to Miami and take a look for yourself!

    1. F. Beard

      If you are indeed poor, then why do you side with the banks who steal to be rich while the poor who steal most often do it just to survive? Will you fall for the banker propaganda designed to set their victims to fighting amongst themselves?

      1. Poor and Unemployed

        I was raised with American values! Dignity, honesty and ethical behavior!

        My dream is to get rich on my own,not steal from my hard working neighbors.

        Who do you think own the banks? Yours and my savings, 401Ks, pension funds, my children’s college fund.

        How come no one has gone to jail for these problems? How about the regulators?

        1. F. Beard

          I was raised with American values! Dignity, honesty and ethical behavior! Poor and Unemployed

          So was I which made it very difficult for me to understand fractional reserve banking since it is so damn crooked.

          My dream is to get rich on my own,not steal from my hard working neighbors. Poor and Unemployed

          Then banking is out for you since it is based on government backed theft of purchasing power from all money holders including and especially the poor. And if you try to get rich any other way then most likely you’ll have to “borrow” from the banks and thereby steal purchasing power from your neighbors yourself.

          Who do you think own the banks? Yours and my savings, 401Ks, pension funds, my children’s college fund. Poor and Unemployed

          I would no more own bank stock than I would own stock in an abortion provider. If we have WWIII, then mostly likely the fractional reserve banks will be the ones to blame just like they are to blame for WWII.

          “Respectable [fractional reserve] banker” is an oxymoron.

          1. Poor and Unemployed

            Are you for real? Is your life a total failure? See a shrink! Get a job! Be honest!

            Most important – learn to live with in you means! Do not borrow and spend. So you do not have to worry so much about banking system

          2. Skippy

            @P&U…Hells hot breath at your back neck…eh, maybe a trip to St. Patrick’s purgatory for repast will avail you of your lament[s.

            Skippy…American values…Un American…Anti American….lol…300 million condensed into a singularity of idealism…a gravitational feat the cosmos would be envious of…sigh.

  57. rg

    Yves,
    I read your blog daily and have been now going on two years. ( the point at which my wife and I lost our house due to a job loss) I first want to applaud you for your op ed piece. It is a significant achievement in raising awareness to the source of the economic crisis.

    I did want to mention that all the solutions I have heard thus far are short sighted in that they only help the smallest portion of current homeowners and do nothing for those already through the process. Loan mods alone are not going to stem the large number of strategic defaults likely to happen due to the continuing drop in home prices. We all know, thanks to you and others, that the neither the banks, nor the lawmakers are motivated to provide real remedies, for which, if you are interested, I see three:
    1. The Federal Government should mandate that all home loans (first, second, thirds, etc.) be refinanced to below 2% and fixed for 30-40 years.
    2. The government should mandate all interest bearing loans for credit cards, and student loans be refinanced to below 2% and forgive any amount over $100,000.
    3. The government should hold a 2 year moratorium on personal income taxes.
    These three things would ensure a near immediate recovery of the economy as all the money now going to pay bank usury, and withholding taxes would be redirected to spending.

    While my ideas may need refinement ( I’ll leave it to experts like you…) they at least help every person impacted either by a loan they can no longer affort to pay and recover from job losses.

    I leave it to you to think about that now.

    Warm regards and may God richly bless.

  58. Judge Roy Bean

    razzz says:
    October 31, 2010 at 5:14 pm
    … Courts are very capable when it comes to handling fraud.

    That’s really an odd statement.

    The vast majority of them have been turning a blind eye to mortgage servicing and affidavit fraud for the last decade or so.

    It’s the old “Are you still beating you wife?” question for most of the judges.

    Don’t count on the court system to prosecute the players; they have unclean hands in this.

      1. Judge Roy Bean

        The rule of law isn’t lost. It’s just been temporarily on loan to the perpetrators of the scheme and now there’s going to be cost.

        Foreclosure is a necessary and long-standing part of mortgage lending. So much so that even in the judicial foreclosure states that it has become so mundane as to allow ignorance of the nuances of the law.

        It has also been very convenient for the players who knew how to take advantage of the sewer the flushed everything into.

        The judicial system eventually became content to accept a certain amount of collateral damage. All those “deadbeats” and all those – you know, the ones with money problems; the ones . . . well, use whatever broad-brush stereotype you want.

        At some point it became easy to make a foreclosure out of whole cloth.

        Apparently we’re supposed to believe that as long as it’s been just “them” being victimized we shouldn’t worry about the rules of civil procedure.

        But what if it wasn’t just them?

        What’s the acceptable level of fraud on the court system?

  59. razzz

    What’s amazing is that courts allow fraudulent documents to be presented then sometimes rejected them and ask fraud to try again in 30 days.

  60. F. Beard

    Are you for real?

    Most definitely. And I intend to become even more so as I read and heed the Bible.

    Is your life a total failure?

    I live such considerations to The Judge.

    See a shrink! Get a job!

    Wait till more unemployed engineers apply their brains to the problem of money and banking. The FR bankers will rue the day they threw them out of work.

    Be honest!

    But of course. However, I point out that this is impossible for an FR banker in his normal line of work.

    Most important – learn to live with in you means!

    Well, I have to, don’t I, since I can’t (in good conscience) borrow from the counterfeiting cartel?

    Do not borrow and spend.

    I don’t but I can see the bind others are in. If one does not borrow from the counterfeiting cartel himself then he risks being permanently priced out of the market by those who do. And since our money supply IS debt then you will probably remain unemployed till someone borrows some money to employ you.

    So you do not have to worry so much about banking system

    I worry about my country since I live here. And I would like to see the US stop being a hypocrite and adopt genuine capitalism.

  61. robertsgt40

    Once the Ferderal Reserve Act was passed, everything associated with banking became a crime. All exits have now been blocked. We’ve been screwed, blued and tatooed. Only solution now is tar, feathers, pitchforks.

  62. Norman

    Private Federal Reserve banks and their useless paper money, yet another violation of our rights. Add it to the list of gov’t violations of our right:
    They violate the 1st Amendment by fencing-in demonstrators at G-20, banning books like “America Deceived II” and trying to take-over the internet.
    They violate the 2nd Amendment by confiscating guns.
    They violate the 4th and 5th Amendment by wireless wiretapping.
    They violate the entire Constitution by starting undeclared wars.
    Impeach Obama (and sweep out the Congress, except Ron Paul).
    [Link of Banned Book]:
    http://www.iuniverse.com/Bookstore/BookDetail.aspx?BookId=SKU-000190526

  63. MaryHolloway Love

    What everyone seems to be missing is that this debacle started with JIMMY CARTER, CONTINUED with CLINTON. The Democratic Presidents & Congress repealed the Glass-Steagle Act which kept Deposit Banks from Acting like Commercial Banks. Also, most IMPORTANT, both Carter & Clinton DEMANDED that home loans be made to LOW INCOME MINORITIES, as HOMEOWNERSHIP was an American Right! To further complicate, orgs like ACORN, and other “Community Outreach Groups” were filing suit against Mortgage Lenders, alleging “Racial Discrimination.” Therefore, the Lenders were ORDERED to make loans to low income. (NINJA loans.) (NoIncomeNoJobNoAssets) In order to try to protect the integrity of the Mortgage Lenders Capital, Return and Shareholder Fudiciary Responsiblity, these loans DID carry a higher interest rate than those classified as PRIME loans; thus the sub-prime designation. Fannie Mae and Freddie Mac were given the same loose guidelines by the Democratically controlled Congress and most politicians, lenders and Banks were terrified on “Discriminatory Lending Suits.” There’s that PC taking the USA down the toilet again! With the Federal Government (USA TAXPAYER) guaranteeing these loans, it wasn’t long before some sharp Wall Street Trader discovered they could be “pooled-some Prime/some sub-prime) and then sold in the secondary market as MBS (Mortgage Backed Securities) or(GBM) Government Backed Mortgages.Then these pools were taken apart, along with hundreds of other pools, repooled and sold again in the secondary market, many to overseas concerns. AIG was one of the multi-faceted Insurance and other concerns that Insured many of the Mortgage Lenders who were not Federal Agencies and also many of the overseas concerns. When the housing market bubble BURST, all hell broke loose, and the entire global financial system was at systemic risk. All due to the fact that minorities who KNEW THEY COULD NEVER PAY BACK A MORTGAGE STRONG ARMED THE ENTIRE MORTGAGE INDUSTRY INTO MAKING SUB-PRIME LOANS, with ZERO $ DOWN, MORE HOUSE THAN THEY COULD EVER PAY FOR, BUT IT WAS INSURED BY THE GOVERNMENT (WHICH MEANT THE TAX PAYER-WHICH MOST OF THEM WERE NOT). I believe Obama served as Attorney of Record in several suits Acorn brought about that time. The really ironic thing that makes me want to VOMIT ALL OVER THESE COMMUNITY ORGANIZING GROUPS is that NOW THEY ARE BRINGING SUIT FOR “PREDATORY LENDING PRACTICES” alleging that the Mortgage Lenders TOOK ADVANTAGE OF POOR PITIFUL THEM AND FORCED THEM TO BORROW MONEY AT A HIGHER RATE THAN NON-MINORITIES AND THIS REALLY ISN’T THEIR FAULT. JUST LIKE BWANEY FWANK SAYS EVERYTIME THE REPUBLICANS TRIED TO PUT THE BRAKES ON FANNIE AND FREDDIE FROM 2003 FORWARD WITH LEGISLATION TO REGULATE THE BOOKKEEPING, THE DEMOCRATS SHOT IT DOWN, AND WHEN BWARNEY KNEW, KNEW FANNIE AND FREDDIE WERE COOKING THE BOOKS AND INSOLVENT, RECOMMENDED TO PEOPLE THAT THEY BUY STOCK IN THESE COMPANIES/ MANY DID, and LOST THEIR ENTIRE LIFES SAVINGS. It’s NOT ALL THE BIG BAD BANKS…IT started a long time ago in a rose garden far far away….

  64. Killer Joe

    Great article, but the alternative solution that you have proposed is not enough. Principal reduction would benefit homeowners and reduce foreclosures, but the second problem is not solved. The rights of the banks remain clouded in insecurity. To avoid the next crisis, we need a solution that would provide homeowners with a mechanism for principal reduction and the banks a magic wand that would render their unsecured interests secured.

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